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Abstract:

Development Discussion Paper
Your Loss Is My Gain: A Recruitment Experiment With Framed Incentives
Jonathan de Quidt
April 2014
Paper No' EOPP 052:
Full Paper (pdf)

JEL Classification: D03; J41; D86


Tags: loss aversion; reference points; framing; selection; mechanical turk

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.