Economics, Econometrics and Finance
4 years ago

Expectation-based loss aversion in contracts leads to inefficient trade outcomes.

SSRN Electronic Journal
Incomplete Contracting, Renegotiation, and Expectation-Based Loss Aversion
Fabian Herweg, Heiko Karle, Daniel Müller

Paper Summary

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The article discusses how buyers and sellers in a trading relationship use long-term contracts and renegotiations to ensure efficient trade outcomes. The type of contract affects the buyer's expectations about renegotiation, leading to either optimal or suboptimal trade results. The study suggests that managing expectations can lead to better trade outcomes, even without specific investments. Loss aversion can also help reduce potential issues in the trading relationship.