Title: Contracts as reference points
Description: "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 &ldquo;employment&rdquo; contracts, which fix wage in advance and allow the employer to choose the task, can be optimal"--John M. Olin Center for Law, Economics, and Business web site.