Penalty contracts: is it all about paying the cash upfront?

Andrea Essl (), Kathrin Friedrich (), Stefanie Schumacher () and Frauke Bieberstein ()
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Andrea Essl: University of Bern
Kathrin Friedrich: University of Bern
Stefanie Schumacher: University of Bern
Frauke Bieberstein: University of Bern

Review of Managerial Science, 2024, vol. 18, issue 1, No 6, 180 pages

Abstract: Abstract We experimentally investigate the relevance of a cash upfront payment for the effort-enhancing effect of penalty contracts. We find that penalty contracts where participants receive the upfront payment physically before working on a real effort task induce more effort than penalty contracts where participants are only informed about the upfront payment. When comparing penalty contracts with economically-equivalent bonus contracts, we find that penalty contracts lead to higher effort provision than bonus contracts, but only if participants physically receive the upfront cash payment in advance. We suggest that the higher salience of the cash upfront payment might be a core driver of the detected framing effect. Our findings emphasize the importance of experimental design choices when studying framed incentive contracts.

Keywords: Penalty contract; Contract framing; Loss framing; Cash upfront payment; Laboratory experiment (search for similar items in EconPapers)
JEL-codes: C91 J24 J33 M52 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11846-022-00617-6

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