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Your loss is my gain: a recruitment experiment with framed incentives

de Quidt, Jonathan (2014) Your loss is my gain: a recruitment experiment with framed incentives. Economic Organisation and Public Policy Discussion Papers (EOPP 52). The London School of Economics and Political Science, Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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Abstract

Empirically, labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success, an effect attributed to loss aversion. This is puzzling, as penalties are infrequently used in practice. The most obvious explanation is selection: loss averse agents are unwilling to accept such contracts. I formalize this intuition, then run an experiment to test it. Surprisingly, I find that workers were 25 percent more likely to accept penalty contracts, with no evidence of adverse or advantageous selection. Consistent with the existing literature, penalty contracts also increased performance on the job by 0.2 standard deviations. I outline extensions to the basic theory that are consistent with the main results, but argue that more research is needed on the long-term effects of penalty contracts if we want to understand why firms seem unwilling to use them.

Item Type: Monograph (Report)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 2014 The Author
Divisions: STICERD
Subjects: H Social Sciences > HB Economic Theory
Sets: Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 24 Jul 2014 10:01
Last Modified: 29 Apr 2019 08:00
Funders: Suntory and Toyota International Centres for Economics and Related Disciplines
URI: http://eprints.lse.ac.uk/id/eprint/58208

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