Contracts as Reference Points
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
University of Edinburgh - Economics; London School of Economics
NBER Working Paper No. w12706
We argue that a contract provides a reference point for a trading relationship: more precisely, for parties' feelings of entitlement. A party's ex post performance depends on whether he gets what he is entitled to relative to outcomes permitted by the contract. A party who is shortchanged shades on performance. A flexible contract allows parties to adjust their outcome to uncertainty, but causes inefficient shading. Our analysis provides a basis for long-term contracts in the absence of noncontractible investments, and elucidates why "employment" contracts, which fix wage in advance and allow the employer to choose the task, can be optimal.
Number of Pages in PDF File: 66working papers series
Date posted: November 20, 2006
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo2 in 0.875 seconds