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Penalty contracts: is it all about paying the cash upfront?

Author

Listed:
  • Andrea Essl

    (University of Bern)

  • Kathrin Friedrich

    (University of Bern)

  • Stefanie Schumacher

    (University of Bern)

  • Frauke Bieberstein

    (University of Bern)

Abstract

We experimentally investigate the relevance of a cash upfront payment for the effort-enhancing effect of penalty contracts. We find that penalty contracts where participants receive the upfront payment physically before working on a real effort task induce more effort than penalty contracts where participants are only informed about the upfront payment. When comparing penalty contracts with economically-equivalent bonus contracts, we find that penalty contracts lead to higher effort provision than bonus contracts, but only if participants physically receive the upfront cash payment in advance. We suggest that the higher salience of the cash upfront payment might be a core driver of the detected framing effect. Our findings emphasize the importance of experimental design choices when studying framed incentive contracts.

Suggested Citation

  • Andrea Essl & Kathrin Friedrich & Stefanie Schumacher & Frauke Bieberstein, 2024. "Penalty contracts: is it all about paying the cash upfront?," Review of Managerial Science, Springer, vol. 18(1), pages 161-180, January.
    • Handle: RePEc:spr:rvmgts:v:18:y:2024:i:1:d:10.1007_s11846-022-00617-6
    DOI: 10.1007/s11846-022-00617-6
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    More about this item

    Keywords

    Penalty contract; Contract framing; Loss framing; Cash upfront payment; Laboratory experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • 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
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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