The Negative Consequences of Loss-Framed Performance Incentives Lamar Pierce Alex Rees-Jones Charlotte Blank NBER Working Paper No. 26619

Issued in January 2020, Revised in July 2020

NBER Program(s):Labor Studies, Public Economics

Behavioral economists have proposed that incentive contracts result in higher productivity when bonuses are "loss framed" prepaid then clawed back if targets are unmet. We test this claim in a large-scale field experiment. Holding financial incentives fixed, we randomized the pre- or post-payment of sales bonuses at 294 car dealerships. Prepayment was estimated to reduce sales by 5%, generating a revenue loss of $45 million over 4 months. We document, both empirically and theoretically, that negative effects of loss framing can arise due to an increase in incentives for "gaming" behaviors. Based on these claims, we reassess the common wisdom regarding the desirability of loss framing.

(1150 K) Acknowledgments Machine-readable bibliographic record - MARC, RIS, BibTeX Document Object Identifier (DOI): 10.3386/w26619