Loss Aversion and the Quantity-Quality Tradeoff
55 Pages Posted: 8 Feb 2016 Last revised: 30 Oct 2016
Date Written: October 28, 2016
Firms face an optimization problem that requires a maximal quantity output given a quality constraint. But how do firms incentivize quantity and quality to meet these dual goals, and what role do behavioral factors such as loss aversion play in the tradeoffs workers face? We address these issues with a theoretical model and an experiment in which participants are paid for both quantity and quality of a real effort task. Consistent with the basic economic theory, higher quality incentives encourage participants to shift their attention from quantity to quality. However, we also find that loss averse subjects shift their attention from quality to quantity to a greater degree when quality is weakly incentivized. These results can inform managers of the most appropriate ways to structure contracts.
Keywords: quantity, quality, experiment, incentives, real effort, loss aversion
JEL Classification: D24, J24, J31, J41
Suggested Citation: Suggested Citation