Loss-framed incentives and employee (mis-)behavior

Loss-framed incentives have received a lot of attention in behavioral economics. In contrast to traditional gain-framed incentive schemes where employees receive a reward upon achieving a pre-specified target, loss-framed incentive schemes entail an upfront payment to employees, which they lose if they fail to reach the target. Several experiments have shown that loss-framed incentives lead to greater effort provision than their gain-framed equivalents both in the lab and in the field – so why don't we see them used more often in real organizations? We explore this puzzle in a laboratory experiment where participants can respond to incentives along three dimensions: effort provision, theft and voluntary provision of help. In this setting we find that framing incentives as a penalty rather than as a reward does not significantly improve task performance, but increases theft and leads to a small and insignificant reduction in the share of participants willing to help the experimenter. Secondary analyses based on our theoretical framework help us pin down the mechanism at play and suggest that loss aversion (rather than behavioral spillovers) drives participants’ response.

We conclude by discussing the implications of our findings for incentive design in practice.

This talk is based on a paper of the same title, forthcoming in Management Science, co-authored with D. Hsu, D. Jimenez Gomez, S. Neckermann and B. Subasi

Eszter Czibor is an applied microeconomist based in Reykjavík, interested in entrepreneurship, innovation and the future of work. She holds a PhD in economics from the University of Amsterdam and worked as a Postdoctoral Scholar at the University of Chicago. This talk is based on several projects Eszter led/participated in as Principal Researcher for Nesta's Innovation Growth Lab between 2019 and 2021.