Framing of Incentives and Effort Provision

22 Pages Posted: 31 Jul 2015

See all articles by Olivier Armantier

Olivier Armantier

Federal Reserve Bank of New York

Amadou Boly

African Development Bank

Date Written: August 2015

Abstract

A prospect theory model combining loss aversion and diminishing sensitivity predicts that the link between incentives framing and effort is ambiguous: small penalties yield higher effort, but isomorphic contracts with large penalties decrease effort. We conduct two experiments (a framed field and a conventional lab experiment) in which economically equivalent contracts are framed as menus of either (i) bonuses, (ii) penalties, or (iii) bonuses and penalties. The experimental results confirm the main intuition of the model as subjects performed best when bonuses and penalties are combined. A follow‐up lottery experiment confirms that both loss aversion and diminishing sensitivity influenced the performance.

Suggested Citation

Armantier, Olivier and Boly, Amadou, Framing of Incentives and Effort Provision (August 2015). International Economic Review, Vol. 56, Issue 3, pp. 917-938, 2015. Available at SSRN: https://ssrn.com/abstract=2638131 or http://dx.doi.org/10.1111/iere.12126

Olivier Armantier (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Amadou Boly

African Development Bank ( email )

Rue Joseph Anoma
Abidjan, Ivory Coast 01 BP 1387
Ivory Coast (Cote D'ivoire)

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