“The Negative Consequences of Loss-framed Performance Incentives,” Alexander Rees-Jones, Cornell University

BEHAVIORAL SCIENCES WORKSHOP

Abstract: Behavioral economists have proposed that loss-averse employees increase productivity when bonuses are “loss framed”—prepaid then clawed back if quotas are unmet. We theoretically document that loss framing raises incentives for costly risk mitigation and for inefficient multitasking, potentially leading to large negative performance effects. We empirically document evidence of these concerns in a nationwide field experiment among 294 car dealers. Dealers randomized into loss-framed (but financially identical) contracts sold 5% fewer vehicles than control dealers, generating a revenue loss of $45 million over 4 months. We discuss implications regarding the use of behavioral economics to motivate both employees and firms. This is joint work with Lamar Pierce and Charlotte Blank.

Alex Rees-Jones is an Associate Professor of Economics at Cornell University. He works in behavioral economics, and is particularly interested in integrating psychology into economic policy analysis.

This workshop series is cosponsored by the Center for the Study of American Politics (CSAP) and the School of Management’s International Center for Finance and Whitebox Advisors fund.