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Stretch It but Don't Break It: The Hidden Cost of Contract Framing

Author

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  • Brooks, Richard W.
  • Stremitzer, Alexander
  • Tontrup, Stephan

Abstract

Recent research suggests that loss-framed contracts are an effective instrument for principals to maximize the effort of their agents. Framing effects arise from defining quantity and quality thresholds that vary the salience of losses and gains even while preserving the payoff equivalence of the underlying contract. While plausible interpre- tations of Prospect theory's loss-aversion insight suggest that a loss frame would lead to more effort, we show that contract thresholds also exert a norm-framing effect on performance that can trump the impact of loss aversion. Loss framing therefore carries a risk: poorly selected thresholds may reduce effort. Principals may prefer to avoid this risk by offering contracts that impose no threshold at all.

Suggested Citation

  • Brooks, Richard W. & Stremitzer, Alexander & Tontrup, Stephan, 2017. "Stretch It but Don't Break It: The Hidden Cost of Contract Framing," EconStor Preprints 335575, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:335575
    DOI: 10.2139/ssrn.2353733
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    2. Shoham Choshen‐Hillel & Ehud Guttel & Alon Harel, 2022. "Framing negligence," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 19(2), pages 296-339, June.
    3. Proestakis, Antonios & Marandola, Ginevra & Lourenço, Joana S. & van Bavel, René, 2024. "Testing a policy intervention in the lab: differences between students and non-students in switching bank accounts," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 111(C).
    4. Buckley, P. & Roussillon, B. & Teyssier, S., 2021. "Gain and loss framing to encourage effort provision: An experiment," Working Papers 2021-02, Grenoble Applied Economics Laboratory (GAEL).
    5. Andrea Essl & Kathrin Friedrich & Stefanie Schumacher & Frauke Bieberstein, 2024. "Penalty contracts: is it all about paying the cash upfront?," Review of Managerial Science, Springer, vol. 18(1), pages 161-180, January.
    6. Lamar Pierce & Alex Rees-Jones & Charlotte Blank, 2025. "The Negative Consequences of Loss-Framed Performance Incentives," American Economic Journal: Economic Policy, American Economic Association, vol. 17(1), pages 506-539, February.
    7. Buckley, Penelope & Roussillon, Béatrice & Teyssier, Sabrina, 2025. "Loss and gain framing to encourage repeated real-effort provision: An experiment," Research in Economics, Elsevier, vol. 79(3).

    More about this item

    Keywords

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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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