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The Negative Consequences of Loss-Framed Performance Incentives

Author

Listed:
  • Lamar Pierce
  • Alex Rees-Jones
  • Charlotte Blank

Abstract

Behavioral economists have proposed that incentive contracts result in higher productivity when bonuses are "loss framed"—prepaid then clawed back if targets are unmet. We test this claim by randomizing the pre- or postpayment of sales bonuses at 294 car dealerships. Although somewhat statistically imprecise, our analysis provides strong indications that the random assignment of loss framing had quantitatively important negative effects. We document that the negative effects of loss framing can arise due to an increase in incentives for "gaming" behaviors. Based on these claims, we reassess the common wisdom regarding the desirability of loss framing.

Suggested Citation

  • Lamar Pierce & Alex Rees-Jones & Charlotte Blank, 2025. "The Negative Consequences of Loss-Framed Performance Incentives," American Economic Journal: Economic Policy, American Economic Association, vol. 17(1), pages 506-539, February.
    • Handle: RePEc:aea:aejpol:v:17:y:2025:i:1:p:506-39
    DOI: 10.1257/pol.20220512
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    More about this item

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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