Loss Aversion and the Quantity-Quality Tradeoff

55 Pages Posted: 8 Feb 2016 Last revised: 30 Oct 2016

See all articles by Jared Rubin

Jared Rubin

Chapman University - The George L. Argyros School of Business & Economics

Anya Samek

Center for Economic and Social Research (CESR); University of Southern California - Department of Economics

Roman M. Sheremeta

Case Western Reserve University

Date Written: October 28, 2016

Abstract

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

Rubin, Jared and Samek, Anya and Sheremeta, Roman M., Loss Aversion and the Quantity-Quality Tradeoff (October 28, 2016). CESR-Schaeffer Working Paper No. 2016-006. Available at SSRN: https://ssrn.com/abstract=2728532 or http://dx.doi.org/10.2139/ssrn.2728532

Jared Rubin (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

One University Drive
Orange, CA 92866
United States

HOME PAGE: http://www.jaredcrubin.com

Anya Samek

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

Roman M. Sheremeta

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

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