Work

Contract breach with overconfident expectations: Experimental evidence on reference-dependent preferences

Year: 2025

Type: article

Abstract: This study examines the effect of agents' overconfident expectations in their production on their contract breach. Drawing on a reference-dependent framework, we theoretically deduce propositions for compliance to agreements where an agent exhibits overconfidence and loss aversion. We further conduct a lab experiment with a multiple-stage design and find that overconfident agents are more likely to breach the contract than non-overconfident agents. Moreover, overconfident agents breach more often and to a greater extent with increasing loss aversion. We also test the impact of a non-deterministic environment (“shock condition”) where payoff misestimation can be masked compared to a deterministic environment (“no-shock condition”). Agents breach more often in the shock condition, but breach extent remains unaffected. Results are mostly in line with the theoretical framework. In a treatment, we manipulate agents' overconfidence exogenously and use it as an instrument to establish causality.

Source: Games and Economic Behavior

DOI: 10.1016/j.geb.2025.05.012

Authors: Sabine Fischer, Kerstin Grosch

Institutions: Deggendorf Institute of Technology, Vienna University of Economics and Business

Language: English

Topic: Experimental Behavioral Economics Studies

Subfield: Safety Research

Field: Social Sciences

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $2,720

Funders: Deutsche Forschungsgemeinschaft, Austrian Science Fund, Kwame Nkrumah University of Science and Technology