Reference Points in Renegotiations: The Role of Contracts and Competition

Bartling, Björn and Schmidt, Klaus M. (3. August 2012): Reference Points in Renegotiations: The Role of Contracts and Competition. SFB/TR 15 Discussion Paper No. 385

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.

• Item Type: Paper
• Form of publication: Preprint
• Keywords: renegotiation, bargaining, reference points, contracts, competition
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > A4 - Unvollständige Verträge, Marktinteraktion und soziale Vergleichsprozesse; Economics; Economics > Chairs > Seminar for Economic Theory
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: C78, C91, D03, D86
• Language: English