Loss aversion in contracts leads to inefficiency and missed opportunities.
Loss aversion can lead to inefficient renegotiation in long-term contracts. Parties tend to stick to the initial contract as a reference point, even if renegotiating could lead to better outcomes. This can result in contracts that are not as beneficial as they could be. The theory suggests that ownership rights may be more effective than specific performance contracts in protecting investments. Additionally, employment contracts can be optimal even if parties can renegotiate freely.