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Loss Averse Agents and Lenient Supervisors in Performance Appraisal

Listed author(s):
  • Lucia Marchegiani

    ()

    (University of Rome 3)

  • Tommaso Reggiani

    ()

    (LUMSA University)

  • Matteo Rizzolli

    ()

    (LUMSA University)

A consistent empirical literature shows that in many organizations supervisors systematically overrate their employees’ performance. Such leniency bias is at odds with the standard principalagent model and has been explained with causes that range from social interactions to fairness concerns and to collusive behavior between the supervisor and the agent. We show that the principal-agent model, extended to consider loss-aversion and reference-dependent preferences, predicts that the leniency bias is comparatively less detrimental to effort provision than the severity bias. We test this prediction with a laboratory experiment where we demonstrate that failing to reward deserving agents is significantly more detrimental than rewarding undeserving agents. This offers a novel explanation as to why supervisors tend to be lenient in their appraisals.

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File URL: http://repec.lumsa.it/wp/wpC11.pdf
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Paper provided by CERBE Center for Relationship Banking and Economics in its series CERBE Working Papers with number wpC11.

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Length: 36 pages
Date of creation: Jul 2016
Handle: RePEc:lsa:wpaper:wpc11
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