Organizations and Markets

New Paper by Hart and Moore

19 April 2007 at 9:25 am Peter G. Klein Leave a comment

| Peter Klein |

I blogged previously about Oliver Hart’s work (with John Moore) on “partial contracts.” The paper has been revised and retitled “Contracts as Reference Points” and is available for NBER subscribers here. 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.

Entry filed under: - Klein -, Recommended Reading, Theory of the Firm.