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Reference Points and Contractual Choices: An Experimental Examination

30 Pages Posted: 20 Aug 2013  

Yuval Feldman

Bar-Ilan University - Faculty of Law

Amos Schurr

Ben-Gurion University of the Negev

Doron Teichman

Hebrew University of Jerusalem - Faculty of Law

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Date Written: September 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.

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: https://ssrn.com/abstract=2312972 or http://dx.doi.org/10.1111/jels.12018

Yuval Feldman (Contact Author)

Bar-Ilan University - Faculty of Law ( email )

Faculty of Law
Ramat Gan, 52900
Israel

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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