Loss Averse Agents and Lenient Supervisors in Performance Appraisal

Lucia Marchegiani (), Tommaso Reggiani and Matteo Rizzolli
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Lucia Marchegiani: University of Rome 3

No wpC11, CERBE Working Papers from CERBE Center for Relationship Banking and Economics

Abstract: A consistent empirical literature shows that in many organizations supervisors systematically overrate their employees’ performance. Such leniency bias is at odds with the standard principalagent model and has been explained with causes that range from social interactions to fairness concerns and to collusive behavior between the supervisor and the agent. We show that the principal-agent model, extended to consider loss-aversion and reference-dependent preferences, predicts that the leniency bias is comparatively less detrimental to effort provision than the severity bias. We test this prediction with a laboratory experiment where we demonstrate that failing to reward deserving agents is significantly more detrimental than rewarding undeserving agents. This offers a novel explanation as to why supervisors tend to be lenient in their appraisals.

Keywords: Performance appraisal; TypeI and TypeII errors; Leniency bias; Severity bias; Economic experiment; Loss aversion; Reference-dependent preferences. (search for similar items in EconPapers)
JEL-codes: C91 J50 M50 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2016-07
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-hrm and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Journal Article: Loss averse agents and lenient supervisors in performance appraisal (2016)
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