Loss-Framed Incentives and Employee (Mis-)Behavior

Abstract

This paper explores how loss-framed incentives affect behavior in a multitasking environment in which participants have more than one way of recovering (expected) losses. In a real-effort laboratory experiment, we offer participants task incentives that are framed as either a reward (gain) or penalty (loss). We study their responses along three dimensions: performance in the incentivized task, theft, and voluntary provision of help. We find that framing incentives as a penalty rather than as a reward does not significantly improve task performance, but it increases theft and leads to a small and insignificant reduction in the share of participants willing to help the experimenter. Secondary analyses based on our theoretical framework help us pin down the mechanism at play and suggest that loss aversion drives participants’ response. Our findings have important implications for incentive design in practice. This paper was accepted by Axel Ockenfels, behavioral economics and decision analysis.