You Win Some, You Lose Some: The Framing of Incentives

OLIN-96-01

Posted: 12 Jun 1997

See all articles by Judi McLean Parks

Judi McLean Parks

Washington University in St. Louis - John M. Olin Business School

Celia Coelho-Kamath

University of Minnesota - Twin Cities - Department of Economics

Date Written: April 1996

Abstract

We use behavioral decision and agency theory to examine how the framing of contingent compensation affects agent preferences and behaviors in three separate studies sampling business undergraduates, MBAs, and physicians. In general, we found support for the risk aversion assumptions of agency theory, as well as the loss aversion posited by prospect theory. In particular, we found agents preferred contracts where there was a higher probability of achieving benchmark goals, and that agents were generally more willing to sacrifice their leisure and less likely to shirk when faced with contingent incentive contracts. We also found that the framing of an incentive as a loss (penalty), rather than a galn (bonus), resulted in a greater willingness to go beyond requirements (organizational citizenship behaviors) and to engage in "mis" behavior (e.g. misrepresenting results, sabotage, and the like). Finally, we found that the framing of incentive affected physicians' recommendations for patient care. Specifically, primary care physicians faced with potential losses were more likely to retain and treat patients themselves rather than refer them to specialists or recommend hospitalization. Physicians found that the procedural fairness of three different compensation plans (salary, fee-for-service and capitation) was equivalent. However, despite equal expected values, the physicians indicated that losses were always distributively unfair.

JEL Classification: J33, I12

Suggested Citation

McLean Parks, Judi and Coelho-Kamath, Celia, You Win Some, You Lose Some: The Framing of Incentives (April 1996). OLIN-96-01, Available at SSRN: https://ssrn.com/abstract=8502

Judi McLean Parks (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-7451 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/mcleanparks/

Celia Coelho-Kamath

University of Minnesota - Twin Cities - Department of Economics

271 19th Avenue South
Minneapolis, MN 55455
United States

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