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Jonathan de Quidt,
Paper No' EOPP 052: | Full paper
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Keywords: loss aversion; reference points; framing; selection; Mechanical Turk
JEL Classification: D03; J41; D86
Is hard copy/paper copy available? YES - Paper Copy Still In Print.
This Paper is published under the following series: Economic Organisation and Public Policy Discussion Papers
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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.
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