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Coordination under loss contracts

Steffen Ahrens, Lea Bitter and Ciril Bosch-Rosa

Games and Economic Behavior, 2023, vol. 137, issue C, 270-293

Abstract: In this paper we study the effects that loss contracts—prepayments that can be clawed back later—have on group coordination when there is strategic uncertainty. To do so, we investigate the choices made by experimental subjects in a minimum effort game. In control sessions, incentives are formulated as a classic gain contract, while in treatment sessions, incentives are framed as an isomorphic loss contract. Contrary to most results in the loss contract literature, in our setup loss contracts backfire by reducing the minimum effort of groups and worsening the coordination between group members. Such results suggest that the success off loss contracts is context dependent and offer an explanation as to why loss contracts are not implemented more often in the wild.

Keywords: Strategic uncertainty; Loss aversion; Coordination; Contract design; Framing; Experiment (search for similar items in EconPapers)
JEL-codes: C91 D84 G11 G41 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Coordination under Loss Contracts (2020) Downloads
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DOI: 10.1016/j.geb.2022.11.010

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