Damage Measures for Contract Breach when Buyers Have Reference-Dependent Preferences

Tim Friehe and Christoph Rössler

Journal of Institutional and Theoretical Economics (JITE), 2022, vol. 178, issue 1, 54-79

Abstract: Using the traditional law-and-economics production contract model with a fixed price, this paper analyzes the breach and reliance incentives that result from damage measures for breach of contract when buyers have reference-dependent preferences. We show that buyer's reference-dependent preferences can produce results at odds with the traditional portrayal. Importantly, we find that expectation damages are no longer generally superior to reliance damages.

Keywords: contract; breach; reference dependence; expectations; loss aversion (search for similar items in EconPapers)
JEL-codes: D81 K12 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1628/jite-2022-0002

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