The Effects of Betrayal Aversion on Effort Provision When Incentives Are Fragile

Abstract

This paper studies the impact of betrayal aversion on employees’ effort provision in exchange for a bonus payment that is at the employers’ expense and discretion. In our first study, using a laboratory experiment, we find that the performance of an employee with average betrayal aversion is lower by more than 15% relative to betrayal-neutral employees. Inspired by the findings, we theoretically identify a tradeoff for the effort provision of betrayal-averse employees. That is, higher effort not only increases the level of betrayal when the bonus is not paid, but it also increases the chances to receive a bonus avoiding betrayal. In a second study, we confirm our findings in an online labor market. The data also find support for the identified tradeoff. In a third study, we manipulate employees’ beliefs about the chances of receiving the bonus to provide causal evidence for the tradeoff. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: This work was supported by the Joachim Herz Foundation. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.02405 .