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Loss Averse Agents and Lenient Supervisors in Performance Appraisal

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  • Lucia Marchegiani

    () (University of Rome 3)

  • Tommaso Reggiani

    () (LUMSA University)

  • Matteo Rizzolli

    () (LUMSA University)

Abstract

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.

Suggested Citation

  • Lucia Marchegiani & Tommaso Reggiani & Matteo Rizzolli, 2016. "Loss Averse Agents and Lenient Supervisors in Performance Appraisal," CERBE Working Papers wpC11, CERBE Center for Relationship Banking and Economics.
  • Handle: RePEc:lsa:wpaper:wpc11
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    Cited by:

    1. De Chiara, Alessandro & Livio, Luca, 2017. "The threat of corruption and the optimal supervisory task," Journal of Economic Behavior & Organization, Elsevier, vol. 133(C), pages 172-186.
    2. Matteo Rizzolli, 2016. "Adjudication: Type-I and Type-II Errors," CERBE Working Papers wpC15, CERBE Center for Relationship Banking and Economics.

    More about this item

    Keywords

    Performance appraisal; TypeI and TypeII errors; Leniency bias; Severity bias; Economic experiment; Loss aversion; Reference-dependent preferences.;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • M50 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - General
    • J50 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - General

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