Events at CERGE-EI

Jonathan de Quidt, Ph.D.

Institute for International Economic Studies (IIES), Stockholm University, Sweden

Author: Jonathan de Quidt

Abstract: As predicted by loss aversion, numerous studies find that penalties elicit greater effort than bonuses, even when the underlying payoffs are identical. Loss aversion also predicts that workers will demand higher wages to accept penalty contracts, a plausible explanation for why they are rare. I recruited data entry workers under framed incentive contracts to test the second prediction. I reproduce the effort effect, but surprisingly penalty framing increased the job offer acceptance rate by 25 percent. Follow-up experiments replicate the finding and rule out explanations based on different beliefs induced by the frame and on a taste for penalties for self-commitment. For example, I find a strong preference for penalties in a guessing task where the probability of success is known and independent of effort. I find suggestive evidence for a form of salience, whereby workers overweight the reference pay in their valuation, but overall the results are a puzzle and call for more research on how and when people form reference points.

Keywords: loss aversion; reference points; framing; selection; salience

JEL Classification: D03, J41, D86

Full Text: “Your Loss Is My Gain: A Recruitment Experiment with Framed Incentives”