Abstract

http://ssrn.com/abstract=2312972
 


 



Reference Points and Contractual Choices: An Experimental Examination


Yuval Feldman


Bar-Ilan University - Faculty of Law; Harvard University - Edmond J. Safra Center for Ethics

Amos Schurr


Ben-Gurion University of the Negev

Doron Teichman


Hebrew University of Jerusalem - Faculty of Law

September 2013

Journal of Empirical Legal Studies, Vol. 10, Issue 3, pp. 512-541, 2013

Abstract:     
This article focuses on the influence of framing on the way people understand their contractual obligations. A large body of both psychological and economic studies suggests that people treat payoffs framed as gains and payoffs framed as losses distinctly. Building on these studies, we hypothesize that the ways parties understand their duties are affected by the way in which they are framed. More specifically, we expect that promisors will tend to adopt a more self‐serving interpretation when they are making decisions in the domain of losses. To test this prediction, we run a series of four experiments that are all based on a between‐subject design. The first two studies utilize experimental surveys that measure and compare participants' attitudes toward a contract interpretation dilemma. The third and fourth studies are incentive‐compatible experiments, in which participants' actual interpretive decisions determine their payoff. All four experiments confirm our basic hypothesis and show that framing contractual payoffs as losses rather than as gains raises parties' tendency to interpret their obligations selfishly. These findings refine some of the previous understanding regarding the ability of penalties to optimize parties' contractual behavior, especially in situations in which monitoring is limited. Based on these findings, the article revisits some of the basic questions of contract law, shedding new light on an array of issues such as the law of liquidated damages and the optimal design of contracts.

Number of Pages in PDF File: 30

Accepted Paper Series





Date posted: August 20, 2013  

Suggested Citation

Feldman, Yuval and Schurr, Amos and Teichman, Doron, Reference Points and Contractual Choices: An Experimental Examination (September 2013). Journal of Empirical Legal Studies, Vol. 10, Issue 3, pp. 512-541, 2013. Available at SSRN: http://ssrn.com/abstract=2312972 or http://dx.doi.org/10.1111/jels.12018

Contact Information

Yuval Feldman (Contact Author)
Bar-Ilan University - Faculty of Law ( email )
Faculty of Law
Ramat Gan, 52900
Israel
Harvard University - Edmond J. Safra Center for Ethics ( email )
124 Mount Auburn Street
Suite 520N
Cambridge, MA 02138
United States

Amos Schurr
Ben-Gurion University of the Negev ( email )
1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel
Doron Teichman
Hebrew University of Jerusalem - Faculty of Law ( email )
Mount Scopus, 91905
Israel

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