Abstract
We study the relative effectiveness of contracts that are framed either in terms of bonuses or penalties. In one set of treatments, subjects know at the time of effort provision whether they have achieved the bonus/avoided the penalty. In another set of treatments, subjects only learn the success of their performance at the end of the task. We fail to observe a contract framing effect in either condition: effort provision is statistically indistinguishable under bonus and penalty contracts.
Highlights
Incentive pay can be very effective in raising employees’ performance (e.g., Lazear 2000), the way incentives are described matters
We study the relative effectiveness of contracts that are framed either in terms of bonuses or penalties
We report an experiment designed to replicate the pattern displayed in Fig. 1 by testing whether the effectiveness of contract framing depends on the availability of information about the performance target
Summary
Incentive pay can be very effective in raising employees’ performance (e.g., Lazear 2000), the way incentives are described matters. Several other studies confirmed this finding, both in the lab (Armantier and Boly 2015; Imas et al 2017) and in the field (Fryer et al 2012; Hossain and List 2012; Hong et al 2015) The size of this framing effect is large.
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