Loss aversion and the quantity–quality tradeoff

• Published in: Experimental economics : a journal of the Economic Science Association Vol. 21; no. 2; pp. 292 - 315
• Main Authors: Rubin, Jared, Samek, Anya, Sheremeta, Roman M.
• Format: Journal Article
• Language: English
• Published: New York Springer US 01-06-2018; Springer Nature B.V
• Subjects: Attention; Behavioral/Experimental Economics; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Game Theory; Incentives; Microeconomics; Operations Research/Decision Theory; Optimization; Original Paper; Quality; Social and Behav. Sciences; Incentives; Quality; Experiment; J41; D24; Real effort; Quantity; J31; J24; Loss aversion
• ISSN: 1386-4157; 1573-6938
• DOI: 10.1007/s10683-017-9544-1

Firms face an optimization problem that requires a maximal quantity output given a quality constraint. But how do firms incentivize quantity and quality to meet these dual goals, and what role do behavioral factors, such as loss aversion, play in the tradeoffs workers face? We address these questions with a theoretical model and an experiment in which participants are paid for both quantity and quality of a real effort task. Consistent with basic economic theory, higher quality incentives encourage participants to shift their attention from quantity to quality. However, we also find that loss averse participants shift their attention from quality to quantity to a greater degree when quality is weakly incentivized. These results can inform managers of appropriate ways to structure contracts, and suggest benefits to personalizing contracts based on individual behavioral characteristics.