Reference Points in Renegotiations: The Role of Contracts and Competition

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.