at Google ScholarTitle data
Herweg, Fabian ; Schmidt, Klaus M.:
Loss Aversion and Inefficient Renegotiation.
In: The Review of Economic Studies.
Vol. 82
(2015)
Issue 1
.
- pp. 297-332.
ISSN 1467-937X
DOI: https://doi.org/10.1093/restud/rdu034
Abstract in another language
We propose a theory of inefficient renegotiation that is based on loss aversion. When two parties write a long-term contract that has to be renegotiated after the realization of the state of the world, they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction. We show that loss aversion makes the renegotiated outcome sticky and materially inefficient. The theory has important implications for the optimal design of long-term contracts. First, it explains why parties often abstain from writing a beneficial long-term contract or why some contracts specify transactions that are never ex post efficient. Secondly, it shows under what conditions parties should rely on the allocation of ownership rights to protect relationship-specific investments rather than writing a specific performance contract. Thirdly, it shows that employment contracts can be strictly optimal even if parties are free to renegotiate.
Further data
| Item Type: | Article in a journal |
|---|---|
| Refereed: | Yes |
| Keywords: | Economics of Contract Theory; Bargaining Theory; Matching Theory; Behavioral Microeconomics Underlying Principles |
| Institutions of the University: | Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics VIII: International Competition Policy > Chair Economics VIII: International Competition Policy - Univ.-Prof. Dr. Fabian Herweg Faculties Faculties > Faculty of Law, Business and Economics Faculties > Faculty of Law, Business and Economics > Department of Economics Faculties > Faculty of Law, Business and Economics > Department of Economics > Chair Economics VIII: International Competition Policy |
| Result of work at the UBT: | Yes |
| DDC Subjects: | 300 Social sciences 300 Social sciences > 330 Economics |
| Date Deposited: | 11 Feb 2015 09:40 |
| Last Modified: | 02 Jun 2022 06:27 |
| URI: | https://eref.uni-bayreuth.de/id/eprint/6678 |