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Reference points in renegotiations: The role of contracts and competition


Bartling, Björn; Schmidt, Klaus M (2012). Reference points in renegotiations: The role of contracts and competition. Working paper series / Department of Economics 89, University of Zurich.

Abstract

Several recent papers argue that contracts provide reference points that affect ex post behavior. We test this hypothesis in a canonical buyer-seller relationship with renegotiation. Our paper provides causal experimental evidence that an initial contract has a highly significant and economically important impact on renegotiation behavior that goes beyond the effect of contracts on bargaining threatpoints. We compare situations in which an initial contract is renegotiated to strategically equivalent bargaining situations in which no ex ante contract was written. The ex ante contract causes sellers to ask for markups that are 45 percent lower than in strategically equivalent bargaining situations without an initial contract. Moreover, buyers are more likely to reject given markups in renegotiations than in negotiations. We do not find that these effects are stronger when the initial contract is concluded under competitive rather than monopolistic conditions.

Several recent papers argue that contracts provide reference points that affect ex post behavior. We test this hypothesis in a canonical buyer-seller relationship with renegotiation. Our paper provides causal experimental evidence that an initial contract has a highly significant and economically important impact on renegotiation behavior that goes beyond the effect of contracts on bargaining threatpoints. We compare situations in which an initial contract is renegotiated to strategically equivalent bargaining situations in which no ex ante contract was written. The ex ante contract causes sellers to ask for markups that are 45 percent lower than in strategically equivalent bargaining situations without an initial contract. Moreover, buyers are more likely to reject given markups in renegotiations than in negotiations. We do not find that these effects are stronger when the initial contract is concluded under competitive rather than monopolistic conditions.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:C78, C91, D03, D86
Uncontrolled Keywords:Renegotiation, bargaining, reference points, contracts, competition
Language:English
Date:August 2012
Deposited On:08 Aug 2012 13:34
Last Modified:05 Apr 2016 15:55
Series Name:Working paper series / Department of Economics
Number of Pages:26
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp089.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php
Permanent URL: http://doi.org/10.5167/uzh-64075

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