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The Negative Consequences of Loss-Framed Performance Incentives

Author

Listed:
  • Lamar Pierce
  • Alex Rees-Jones
  • Charlotte Blank

Abstract

Behavioral economists have proposed that loss-averse employees increase productivity when bonuses are "loss framed"—prepaid then clawed back if targets are unmet. We theoretically document that loss framing raises incentives for costly risk mitigation and for inefficient multitasking, potentially leading to large negative performance effects. We empirically document evidence of these concerns in a nationwide field experiment among 294 car dealers. Dealers randomized into loss-framed (but financially identical) contracts sold 5% fewer vehicles than control dealers, generating a revenue loss of $45 million over 4 months. We discuss implications regarding the use of behavioral economics to motivate both employees and firms.

Suggested Citation

  • Lamar Pierce & Alex Rees-Jones & Charlotte Blank, 2020. "The Negative Consequences of Loss-Framed Performance Incentives," NBER Working Papers 26619, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26619
    Note: LS PE
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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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