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Task Assignment under Agent Loss Aversion

Author

Listed:
  • Kohei Daido

    () (School of Economics, Kwansei Gakuin University)

  • Kimiyuki Morita

    () (Graduate School of Commerce and Management, Hitotsubashi University)

  • Takeshi Murooka

    () (Department of Economics, University of California-Berkeley)

  • Hiromasa Ogawa

    () (Graduate School of Economics, University of Tokyo)

Abstract

We analyze a simple task-assignment model in which a principal assigns a task to one of two agents depending on the state. If the agents have standard concave utility, the principal assigns the task to an agent with the highest productivity in each state. In contrast, if the agents are loss averse, in order to alleviate their expected losses the principal may assign the task to a single agent in all states. Furthermore, the optimal contract may specify the same effort level across states. Our results imply that such simple contracts can be optimal even when employers can write contingent contracts at no cost.

Suggested Citation

  • Kohei Daido & Kimiyuki Morita & Takeshi Murooka & Hiromasa Ogawa, 2013. "Task Assignment under Agent Loss Aversion," Discussion Paper Series 103, School of Economics, Kwansei Gakuin University, revised Mar 2013.
  • Handle: RePEc:kgu:wpaper:103
    as

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    File URL: http://192.218.163.163/RePEc/pdf/kgdp103.pdf
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    References listed on IDEAS

    as
    1. Paul Heidhues & Botond Köszegi, 2004. "The Impact of Consumer Loss Aversion on Pricing," CIG Working Papers SP II 2004-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    2. Jean Tirole, 2009. "Cognition and Incomplete Contracts," American Economic Review, American Economic Association, vol. 99(1), pages 265-294, March.
    3. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1133-1165.
    4. Oliver Hart & John Moore, 2008. "Contracts as Reference Points," The Quarterly Journal of Economics, Oxford University Press, vol. 123(1), pages 1-48.
    5. Fabian Herweg & Konrad Mierendorff, 2013. "Uncertain Demand, Consumer Loss Aversion, And Flat-Rate Tariffs," Journal of the European Economic Association, European Economic Association, vol. 11(2), pages 399-432, April.
    6. Fabian Herweg & Daniel Muller & Philipp Weinschenk, 2010. "Binary Payment Schemes: Moral Hazard and Loss Aversion," American Economic Review, American Economic Association, vol. 100(5), pages 2451-2477, December.
    7. Ernst Fehr & Oliver Hart & Christian Zehnder, 2011. "Contracts as Reference Points--Experimental Evidence," American Economic Review, American Economic Association, vol. 101(2), pages 493-525, April.
    8. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
    9. Botond Koszegi & Matthew Rabin, 2007. "Reference-Dependent Risk Attitudes," American Economic Review, American Economic Association, vol. 97(4), pages 1047-1073, September.
    10. Botond Kőszegi & Paul Heidhues, 2008. "Competition and Price Variation When Consumers Are Loss Averse," American Economic Review, American Economic Association, vol. 98(4), pages 1245-1268, September.
    11. Gill, David & Stone, Rebecca, 2010. "Fairness and desert in tournaments," Games and Economic Behavior, Elsevier, vol. 69(2), pages 346-364, July.
    12. Daido, Kohei & Morita, Kimiyuki & Murooka, Takeshi & Ogawa, Hiromasa, 2013. "Task assignment under agent loss aversion," Economics Letters, Elsevier, vol. 121(1), pages 35-38.
    13. repec:bla:jemstr:v:25:y:2016:i:4:p:958-989 is not listed on IDEAS
    14. Kohei Daido & Takeshi Murooka, 2016. "Team Incentives and Reference-Dependent Preferences," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(4), pages 958-989, December.
    15. Fabian Herweg & Klaus Schmidt, 2012. "Loss Aversion and Ex Post Inefficient Renegotiation," CESifo Working Paper Series 4031, CESifo Group Munich.
    16. Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-1231, December.
    17. Jean Tirole, 1999. "Incomplete Contracts: Where Do We Stand?," Econometrica, Econometric Society, vol. 67(4), pages 741-782, July.
    18. Kohei Daido & Hideshi Itoh, 2007. "The Pygmalion and Galatea Effects: An Agency Model with Reference-Dependent Preferences and Applications to Self-Fulfilling Prophecy," Discussion Paper Series 35, School of Economics, Kwansei Gakuin University, revised Sep 2007.
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    Citations

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    Cited by:

    1. Marchegiani, Lucia & Reggiani, Tommaso & Rizzolli, Matteo, 2016. "Loss averse agents and lenient supervisors in performance appraisal," Journal of Economic Behavior & Organization, Elsevier, vol. 131(PA), pages 183-197.
    2. Dato, Simon & Müller, Daniel & Grunewald, Andreas, 2015. "Expectation-Based Loss Aversion and Strategic Interaction," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112947, Verein für Socialpolitik / German Economic Association.
    3. Daido, Kohei & Morita, Kimiyuki & Murooka, Takeshi & Ogawa, Hiromasa, 2013. "Task assignment under agent loss aversion," Economics Letters, Elsevier, vol. 121(1), pages 35-38.
    4. Doruk Iris & Alessandro Tavoni, 2016. "Tipping Points and Loss Aversion in International Environmental Agreements," Working Papers 1603, Research Institute for Market Economy, Sogang University.
    5. repec:eee:gamebe:v:104:y:2017:i:c:p:681-705 is not listed on IDEAS
    6. repec:eee:jeborg:v:145:y:2018:i:c:p:176-201 is not listed on IDEAS
    7. Simon Dato & Andreas Grunewald & Daniel Müller, 2015. "Expectation-Based Loss Aversion and Strategic Interaction," Bonn Econ Discussion Papers bgse02_2015, University of Bonn, Germany.

    More about this item

    Keywords

    task assignment; loss aversion; reference-dependent preferences;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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