The Role of Effort Cost Perception in Outcome Bias

Abstract

Outcome bias is pervasive and persistent across different environments. In our noisy gift-exchange game, where agents can perform a real effort task to improve principals' lottery win probability, we replicate outcome bias in effort rewarding when effort is only numerically observable. To investigate the role of principals' beliefs on effort cost, we employed a visual treatment in which principals watch a 30-second video of the agents performing the task. We show that visually observing agents' work corrects asymmetry in rewarding effort. The post-experiment survey suggests that the mechanism through which visually observing effort reduces the outcome bias in reciprocating effort is informing principals about the cost of effort.

Keywords: outcome bias, reciprocity, real effort, visual, non-payoff relevant dimension, effort cost perception

JEL Classification: C92, D63, D64, D83