Examining relative thinking in mixed compensation schemes: A replication study

Ofer Azar and Alisa Voslinsky

Journal of Economic Behavior & Organization, 2024, vol. 218, issue C, 568-578

Abstract: Studies show that people exhibit relative thinking: they are affected by relative price differences even when these are irrelevant. The evidence is mostly based on hypothetical-scenario experiments in consumer-behavior contexts. A previous attempt to show relative thinking in the context of mixed compensation schemes (which include a fixed payment and a pay-for-performance payment) failed to document relative thinking (Azar, 2019). We replicate the main features of this study, but now do find evidence for relative thinking. Subjects are offered to do real-effort tasks of finding letters on pages and all of them are paid the same amount for every correct answer. However, there are two versions that differ in the fixed payment that is added. Effort is lower when the fixed payment is higher. This is explained by relative thinking: the higher fixed payment makes the per-task payment seem smaller compared to it, and therefore results in less effort. This finding has important implications because mixed compensation schemes are prevalent in many jobs and are also a common feature of experiments (a fixed show-up fee and a payment that depends on performance). We also find some connection between the behavior in the experiment and the decision-making style of the subjects (measured on scales of intuitive, rational, and spontaneous). Subjects with more spontaneous decision-making style make less effort in the experiment. Subjects with more intuitive decision-making style are less affected by relative thinking. Our study offers the first demonstration of relative thinking in the context of mixed compensation schemes.

Keywords: Replication; Relative thinking; Compensation schemes; Decision-making styles; Pay-for-performance; Heuristics and biases (search for similar items in EconPapers)
JEL-codes: C91 D91 J30 M12 M20 M52 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:218:y:2024:i:c:p:568-578

DOI: 10.1016/j.jebo.2024.01.001

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