How Do Informal Agreements and Renegotiation Shape Contractual Reference Points?

54 Pages Posted: 22 Dec 2011

See all articles by Ernst Fehr

Ernst Fehr

University of Zurich - Department of Economics

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Christian Zehnder

University of Lausanne

Multiple version iconThere are 4 versions of this paper

Date Written: October 1, 2011

Abstract

Previous experimental work provides encouraging support for some of the central assumptions underlying Hart and Moore (2008)’s theory of contractual reference points. However, existing studies ignore realistic aspects of trading relationships such as informal agreements and ex post renegotiation. We investigate the relevance of these features experimentally. Our evidence indicates that the central behavioral mechanism underlying the concept of contractual reference points is robust to the presence of informal agreements and ex post renegotiation. However, our data also reveal new behavioral features that suggest refinements of the theory. In particular, we find that the availability of informal agreements and ex post renegotiation changes how trading parties evaluate ex post outcomes. Interestingly, the availability of these additional options affects ex post evaluations even in situations in which the parties do not use them.

Keywords: Incomplete Contracts, Contractual Reference Points, Renegotiation, Informal Agreements, Laboratory Experiment

JEL Classification: C91, D86, D03, J41

Suggested Citation

Fehr, Ernst and Hart, Oliver D. and Zehnder, Christian, How Do Informal Agreements and Renegotiation Shape Contractual Reference Points? (October 1, 2011). Available at SSRN: https://ssrn.com/abstract=1975130 or http://dx.doi.org/10.2139/ssrn.1975130

Ernst Fehr

University of Zurich - Department of Economics ( email )

Blümlisalpstrasse 10
Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

Oliver D. Hart (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-3461 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christian Zehnder

University of Lausanne ( email )

Quartier Chambronne
Lausanne, Vaud CH-1015
Switzerland

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