Abstract

http://ssrn.com/abstract=2353733
 


 



Stretch It But Don't Break It: The Hidden Risk of Contract Framing


Richard R. W. Brooks


Yale University - Law School

Alexander Stremitzer


UCLA School of Law

Stephan W. Tontrup


Max Planck Institute for Research on Collective Goods

June 3, 2014

UCLA School of Law, Law-Econ Research Paper No. 13-22

Abstract:     
Recent research suggests that loss framed contracts are an effective instrument for principals to maximize the effort of their agents. Framing effects arise from defining thresholds that vary the salience of losses and gains while preserving payoff equivalence of the underlying contract. While under Prospect Theory a loss frame should lead to more effort we show that contract thresholds also exert a suggestive effect on performance that can trump the impact of loss aversion. Loss framing therefore carries a risk. As agents focus their effort choice on the expressed thresholds, poorly selected thresholds reduce effort and the principal might prefer offering a contract that does not impose a threshold at all. On the other hand, imposing demanding thresholds may push effort beyond levels predicted by Prospect Theory.

Number of Pages in PDF File: 24

Keywords: contracts, framing effects, loss aversion, prospect theory, expressed thresholds, worker productivity

JEL Classification: C91, D02, J33, K12

working papers series


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Date posted: November 13, 2013 ; Last revised: July 23, 2014

Suggested Citation

Brooks, Richard R. W. and Stremitzer, Alexander and Tontrup, Stephan W., Stretch It But Don't Break It: The Hidden Risk of Contract Framing (June 3, 2014). UCLA School of Law, Law-Econ Research Paper No. 13-22. Available at SSRN: http://ssrn.com/abstract=2353733 or http://dx.doi.org/10.2139/ssrn.2353733

Contact Information

Richard R. W. Brooks
Yale University - Law School ( email )
P.O. Box 208215
New Haven, CT 06520-8215
United States
Alexander Stremitzer (Contact Author)
UCLA School of Law ( email )
405 Hilgard Avenue
Box 90095-1476
Los Angeles, CA 90095-1476
United States
HOME PAGE: http://www.law.ucla.edu/faculty/all-faculty-profiles/professors/Pages/Alexander-Stremitzer.aspx
Stephan W. Tontrup
Max Planck Institute for Research on Collective Goods ( email )
Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany
00492289141643 (Phone)
0049/228/91416-55 (Fax)
HOME PAGE: http://www..coll.mpg.de/

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