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Coordination under loss contracts

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  • Ahrens, Steffen
  • Bitter, Lea
  • Bosch-Rosa, Ciril

Abstract

In this paper we study the effects that loss contracts—prepayments that can be clawed back later—have on group coordination when there is strategic uncertainty. To do so, we investigate the choices made by experimental subjects in a minimum effort game. In control sessions, incentives are formulated as a classic gain contract, while in treatment sessions, incentives are framed as an isomorphic loss contract. Contrary to most results in the loss contract literature, in our setup loss contracts backfire by reducing the minimum effort of groups and worsening the coordination between group members. Such results suggest that the success off loss contracts is context dependent and offer an explanation as to why loss contracts are not implemented more often in the wild.

Suggested Citation

  • Ahrens, Steffen & Bitter, Lea & Bosch-Rosa, Ciril, 2023. "Coordination under loss contracts," Games and Economic Behavior, Elsevier, vol. 137(C), pages 270-293.
    • Handle: RePEc:eee:gamebe:v:137:y:2023:i:c:p:270-293
    DOI: 10.1016/j.geb.2022.11.010
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    More about this item

    Keywords

    Strategic uncertainty; Loss aversion; Coordination; Contract design; Framing; Experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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