<scp>Reference‐dependent</scp> preferences in flat penalty <scp>service‐level</scp> contracts

This paper investigates a supply chain governed by flat penalty service-level contract in which missing the target fill rate can lead to costly operational disruption. We focus on near-miss bias: (1) preference for events, that is, risky production quantities reach but narrowly avoid disruption; and (2) riskier decision-making due such preferences. propose reference-dependent behavioral model explains bias. The findings of laboratory experiment show are evaluated based realized profits below optimal prediction. Contracts associated with lower perceived severity, ratio wholesale price, result than those higher even though standard does not predict any effect. A structural estimation analysis indicates performs better terms predictive accuracy goodness fit. Our provides insights managers who design contracts settings considerable risk disruption shortage critical parts.