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Contracts, reference points, and competition—behavioral effects of the fundamental transformation


Fehr, Ernst; Hart, Oliver; Zehnder, Christian (2009). Contracts, reference points, and competition—behavioral effects of the fundamental transformation. Journal of the European Economic Association, 7(2-3):561-572.

Abstract

In this paper we study the role of incomplete ex ante contracts for ex post trade. Previous experimental evidence indicates that a contract provides a reference point for entitlements when the terms are negotiated in a competitive market. We show that this finding no longer holds when the terms are determined in a non-competitive way. Our results imply that the presence of a “fundamental transformation” (i.e., the transition from a competitive market to a bilateral relationship) is important for a contract to become a reference point. To the best of our knowledge this behavioral aspect of the fundamental transformation has not been shown before.

Abstract

In this paper we study the role of incomplete ex ante contracts for ex post trade. Previous experimental evidence indicates that a contract provides a reference point for entitlements when the terms are negotiated in a competitive market. We show that this finding no longer holds when the terms are determined in a non-competitive way. Our results imply that the presence of a “fundamental transformation” (i.e., the transition from a competitive market to a bilateral relationship) is important for a contract to become a reference point. To the best of our knowledge this behavioral aspect of the fundamental transformation has not been shown before.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2009
Deposited On:22 Feb 2010 10:31
Last Modified:05 Apr 2016 13:59
Publisher:MIT Press
ISSN:1542-4766
Additional Information:Copyright: MIT Press
Publisher DOI:https://doi.org/10.1162/JEEA.2009.7.2-3.561

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