FRAMING OF INCENTIVES AND EFFORT PROVISION

Olivier Armantier · Amadou Boly

57 citations0/0 files storedInternational Economic Review

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Experimental Behavioral Economics Studies Decision-Making and Behavioral Economics Auction Theory and Applications

Abstract

A prospect theory model combining loss aversion and diminishing sensitivity predicts that the link between incentives framing and effort is ambiguous: small penalties yield higher effort, but isomorphic contracts with large penalties decrease effort. We conduct two experiments (a framed field and a conventional lab experiment) in which economically equivalent contracts are framed as menus of either (i) bonuses, (ii) penalties, or (iii) bonuses and penalties. The experimental results confirm the main intuition of the model as subjects performed best when bonuses and penalties are combined. A follow‐up lottery experiment confirms that both loss aversion and diminishing sensitivity influenced the performance.

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References

1979Prospect Theory: An Analysis of Decision under Risk 1988Prospect theory: An analysis of decision under risk 2000Choices, Values, and Frames 2003Intrinsic and Extrinsic Motivation 2006A Model of Reference-Dependent Preferences 2004Field Experiments 1993Does Fairness Prevent Market Clearing? An Experimental Investigation 2010Sustaining cooperation in laboratory public goods experiments: a selective survey of the literature

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