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Experimental Economics

, Volume 21, Issue 2, pp 292–315 | Cite as

Loss aversion and the quantity–quality tradeoff

  • Jared Rubin
  • Anya Samek
  • Roman M. SheremetaEmail author
Original Paper

Abstract

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.

Keywords

Quantity Quality Experiment Incentives Real effort Loss aversion 

JEL Classifications

D24 J24 J31 J41 

Notes

Acknowledgements

We thank Marie Claire Villeval, the editor of this journal, for her guidance and two anonymous reviewers for their suggestions and comments. We thank David Clingingsmith, Catherine Eckel, Sue Helper, Jonathan Meer, Matthew Sobel, Scott Shane, Jingjing Zhang and seminar participants at Case Western Reserve University, Texas A&M, University of Southern California, and the University of Technology Sydney for helpful comments. We also thank Kevin Guo, Christa Gibbs, Kathryn Carroll and students at the Behavioral and Experimental Economics Research Group for excellent research assistance. Any remaining errors are ours.

Supplementary material

10683_2017_9544_MOESM1_ESM.docx (142 kb)
Supplementary material 1 (DOCX 142 kb)

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Copyright information

© Economic Science Association 2017

Authors and Affiliations

  1. 1.Argyros School of Business and EconomicsChapman University One University DriveOrangeUSA
  2. 2.Dornsife College of Letters, Arts and SciencesUniversity of Southern CaliforniaLos AngelesUSA
  3. 3.Weatherhead School of ManagementCase Western Reserve UniversityClevelandUSA

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