Contracts as Reference Points

66 Pages Posted: 20 Nov 2006 Last revised: 21 Sep 2010

See all articles by Oliver Hart

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

John Moore

University of Edinburgh - Economics; London School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: November 2006

Abstract

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.

Suggested Citation

Hart, Oliver D. and Moore, John Hardman, Contracts as Reference Points (November 2006). NBER Working Paper No. w12706, Available at SSRN: https://ssrn.com/abstract=945346

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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
43
Abstract Views
1,523
PlumX Metrics