Performance targets, effort and risk-taking
Growing economic and psychological evidence documents effects of target setting on levels of effort and risk-taking, even in the absence of a monetary reward for attaining the target. I explore a principal-agent environment in which the principal sets the agent a performance target, and the agent's intrinsic motivation to work is influenced by their performance relative to the target. When the agent has prospect theory preferences relative to the target I show that a performance target can induce greater effort, but, when set too high, it eventually induces lower effort. Also, the agent's preferences for risk-taking hinge on whether the target is set above or below expected output. I find that the principal's optimal target exceeds expected output.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew E. Clark, 2003.
"Unemployment as a Social Norm: Psychological Evidence from Panel Data,"
Journal of Labor Economics,
University of Chicago Press, vol. 21(2), pages 289-322, April.
- Andrew Clark, 2001. "Unemployment As A Social Norm: Psychological Evidence from Panel Data," DELTA Working Papers 2001-17, DELTA (Ecole normale supérieure).
- Luis Rayo & Gary S. Becker, 2007. "Evolutionary Efficiency and Happiness," Journal of Political Economy, University of Chicago Press, vol. 115, pages 302-337.
- Aldo Rustichini & Uri Gneezy, 2000.
"A fine is a price,"
Natural Field Experiments
00258, The Field Experiments Website.
- George A. Akerlof, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, Oxford University Press, vol. 97(4), pages 543-569.
- MatthewD. Rablen, 2008. "Relativity, Rank and the Utility of Income," Economic Journal, Royal Economic Society, vol. 118(528), pages 801-821, 04.
- Mezias, Stephen J., 1988. "Aspiration level effects: An empirical investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 10(4), pages 389-400, December.
- Berkelaar, A.B. & Kouwenberg, R.R.P., 2000.
"Optimal portfolio choice under loss aversion,"
Econometric Institute Research Papers
EI 2000-08/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Mohammed Abdellaoui, 2000. "Parameter-Free Elicitation of Utility and Probability Weighting Functions," Management Science, INFORMS, vol. 46(11), pages 1497-1512, November.
- Alexandre Mas, 2006. "Pay, Reference Points, and Police Performance," NBER Working Papers 12202, National Bureau of Economic Research, Inc.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- John A. Rizzo & Richard J. Zeckhauser, 2003. "Reference Incomes, Loss Aversion, and Physician Behavior," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 909-922, November.
- Fabian Herweg & Daniel Müller & Philipp Weinschenk, 2008. "The Optimality of Simple Contracts: Moral Hazard and Loss Aversion," Bonn Econ Discussion Papers bgse17_2008, University of Bonn, Germany.
- Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory and Asset Prices," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 1-53.
- Dhami, Sanjit & al-Nowaihi, Ali, 2007.
"Why do people pay taxes? Prospect theory versus expected utility theory,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 64(1), pages 171-192, September.
- Sanjit Dhami & Ali al-Nowaihi, 2005. "Why Do People Pay Taxes? Prospect Theory Versus Expected Utility Theory," Discussion Papers in Economics 05/23, Department of Economics, University of Leicester, revised Aug 2006.
- Dan J. Laughhunn & John W. Payne & Roy Crum, 1980. "Managerial Risk Preferences for Below-Target Returns," Management Science, INFORMS, vol. 26(12), pages 1238-1249, December.
- Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2004.
"Moral Hazard, Income Taxation, and Prospect Theory,"
0430, University of Tampere, School of Management, Economics.
- Kanbur, Ravi & Pirttila, Jukka & Tuomala, Matti, 2004. "Moral Hazard, Income Taxation, And Prospect Theory," Working Papers 127136, Cornell University, Department of Applied Economics and Management.
- Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
- Clark, Andrew E & Oswald, Andrew J, 1994. "Unhappiness and Unemployment," Economic Journal, Royal Economic Society, vol. 104(424), pages 648-59, May.
- DiTella, Rafael & MacCulloch, Robert & Oswald, Andrew J., 1999.
"The macroeconomics of happiness,"
ZEI Working Papers
B 03-1999, University of Bonn, ZEI - Center for European Integration Studies.
- Di Tella, Rafael & MacCulloch, Robert J. & Oswald, Andrew J., 2001. "The Macroeconomics of Happiness," The Warwick Economics Research Paper Series (TWERPS) 615, University of Warwick, Department of Economics.
- Di Tella, R. & MacCulloch, R.J.: Oswald, A.J., 1997. "The Macroeconomics of Happiness," Papers 19, Centre for Economic Performance & Institute of Economics.
- George Wu & Richard Gonzalez, 1999. "Nonlinear Decision Weights in Choice Under Uncertainty," Management Science, INFORMS, vol. 45(1), pages 74-85, January.
- Henry S. Farber, 2008. "Reference-Dependent Preferences and Labor Supply: The Case of New York City Taxi Drivers," American Economic Review, American Economic Association, vol. 98(3), pages 1069-82, June.
- David De Meza & David C Webb, 2006.
"Incentive Design under Loss Aversion,"
FMG Discussion Papers
dp571, Financial Markets Group.
- Theresa K. Lant, 1992. "Aspiration Level Adaptation: An Empirical Exploration," Management Science, INFORMS, vol. 38(5), pages 623-644, May.
- George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
- John W. Payne & Dan J. Laughhunn & Roy Crum, 1981. "Note---Further Tests of Aspiration Level Effects in Risky Choice Behavior," Management Science, INFORMS, vol. 27(8), pages 953-958, August.
- Frey, Bruno S., 1997. "On the relationship between intrinsic and extrinsic work motivation1," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 427-439, July.
- Jensen, Michael C & Murphy, Kevin J, 1990.
"Performance Pay and Top-Management Incentives,"
Journal of Political Economy,
University of Chicago Press, vol. 98(2), pages 225-64, April.
- Colin Camerer & Linda Babcock & George Loewenstein & Richard Thaler, 1997. "Labor Supply of New York City Cabdrivers: One Day at a Time," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 407-441.
- Donald B. Hausch & William T. Ziemba & Mark Rubinstein, 1981. "Efficiency of the Market for Racetrack Betting," Management Science, INFORMS, vol. 27(12), pages 1435-1452, December.
- Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Clark, Andrew E. & Oswald, Andrew J., 1998. "Comparison-concave utility and following behaviour in social and economic settings," Journal of Public Economics, Elsevier, vol. 70(1), pages 133-155, October.
- Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
- Ian Bateman & Alistair Munro & Bruce Rhodes & Chris Starmer & Robert Sugden, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 112(2), pages 479-505.
When requesting a correction, please mention this item's handle: RePEc:eee:joepsy:v:31:y:2010:i:4:p:687-697. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.