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Ernst Fehr, Christian Zehnder, Oliver Hart, Contracts, Reference Points, and Competition—Behavioral Effects of the Fundamental Transformation, Journal of the European Economic Association, Volume 7, Issue 2-3, 1 May 2009, Pages 561–572, https://doi.org/10.1162/JEEA.2009.7.2-3.561
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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.