 Contract breach with overconfident expectations: Experimental evidence on reference-dependent preferencesSabine Fischer and Kerstin Grosch Games and Economic Behavior, 2025, vol. 153, issue C, 145-163 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. Keywords: Contract compliance; Overconfidence; Loss aversion; Reference-dependent preferences; Lab experiment (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:153:y:2025:i:c:p:145-163 DOI: 10.1016/j.geb.2025.05.012 Access Statistics for this article Games and Economic Behavior is currently edited by E. Kalai More articles in Games and Economic Behavior from Elsevier |
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