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Your Loss Is My Gain: A Recruitment Experiment With Framed Incentives

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  • Jonathan de Quidt

Abstract

Empirically, labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success, an effect attributed to loss aversion. This is puzzling, as penalties are infrequently used in practice. The most obvious explanation is selection: loss averse agents are unwilling to accept such contracts. I formalize this intuition, then run an experiment to test it. Surprisingly, I find that workers were 25 percent more likely to accept penalty contracts, with no evidence of adverse or advantageous selection. Consistent with the existing literature, penalty contracts also increased performance on the job by 0.2 standard deviations. I outline extensions to the basic theory that are consistent with the main results, but argue that more research is needed on the long-term effects of penalty contracts if we want to understand why firms seem unwilling to use them.

Suggested Citation

  • Jonathan de Quidt, 2014. "Your Loss Is My Gain: A Recruitment Experiment With Framed Incentives," STICERD - Economic Organisation and Public Policy Discussion Papers Series 052, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  • Handle: RePEc:cep:stieop:052
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    Cited by:

    1. Essl, Andrea & Jaussi, Stefanie, 2017. "Choking under time pressure: The influence of deadline-dependent bonus and malus incentive schemes on performance," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 127-137.
    2. Ispano, Alessandro & Schwardmann, Peter, 2017. "Cooperating over losses and competing over gains: A social dilemma experiment," Games and Economic Behavior, Elsevier, vol. 105(C), pages 329-348.
    3. Jonathan Quidt & Francesco Fallucchi & Felix Kölle & Daniele Nosenzo & Simone Quercia, 2017. "Bonus versus penalty: How robust are the effects of contract framing?," Journal of the Economic Science Association, Springer;Economic Science Association, vol. 3(2), pages 174-182, December.
    4. Robert Hahn & Robert D. Metcalfe & David Novgorodsky & Michael K. Price, 2016. "The Behavioralist as Policy Designer: The Need to Test Multiple Treatments to Meet Multiple Targets," Experimental Economics Center Working Paper Series 2016-05, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    5. Alex Imas & Sally Sadoff & Anya Samek, 2015. "Do People Anticipate Loss Aversion?," CESifo Working Paper Series 5277, CESifo Group Munich.
    6. Daniele Nosenzo, 2016. "Employee incentives: Bonuses or penalties?," IZA World of Labor, Institute for the Study of Labor (IZA), pages 234-234, January.

    More about this item

    Keywords

    loss aversion; reference points; framing; selection; Mechanical Turk;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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