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Contracts as Reference Points

Oliver Hart

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

John Moore

University of Edinburgh - Economics; London School of Economics

November 2006

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 non-contractible 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: 66

Keywords: contracts, reference points, entitlements, aggrievement

JEL Classification: D23, D86, K12

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Date posted: November 14, 2006  

Suggested Citation

Hart , Oliver and Moore, John, Contracts as Reference Points (November 2006). Available at SSRN: https://ssrn.com/abstract=944784 or http://dx.doi.org/10.2139/ssrn.944784

Contact Information

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
John Hardman Moore
University of Edinburgh - Economics ( email )
50 George Square
Edinburgh, EH8 9JY, Scotland
United Kingdom
London School of Economics ( email )
Houghton Street
London WC2A 2AE
United Kingdom
44-171-955-7550 (Phone)
44-171-831-1840 (Fax)
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