The Negative Consequences of Loss-Framed Performance Incentives
Alex Rees-Jones and
No 26619, NBER Working Papers from National Bureau of Economic Research, Inc
Behavioral economists have proposed that incentive contracts result in higher productivity when bonuses are “loss framed”—prepaid then clawed back if targets are unmet. We test this claim in a large-scale field experiment. Holding financial incentives fixed, we randomized the pre- or post-payment of sales bonuses at 294 car dealerships. Prepayment was estimated to reduce sales by 5%, generating a revenue loss of $45 million over 4 months. We document, both empirically and theoretically, that negative effects of loss framing can arise due to an increase in incentives for “gaming” behaviors. Based on these claims, we reassess the common wisdom regarding the desirability of loss framing.
JEL-codes: D03 D81 J22 J31 (search for similar items in EconPapers)
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