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Loss aversion and the quantity–quality tradeoff

Published online by Cambridge University Press:  14 March 2025

Jared Rubin,
Anya Samek and
Roman M. SheremetaOpen the ORCID record for Roman M. Sheremeta[Opens in a new window]
Jared Rubin
Affiliation:
Argyros School of Business and Economics, Chapman University One University Drive, Orange, CA 92866, USA
Anya Samek
Affiliation:
Dornsife College of Letters, Arts and Sciences, University of Southern California, 635 Downey Way Los Angeles, CA, USA
Roman M. Sheremeta*
Affiliation:
Weatherhead School of Management, Case Western Reserve University, 11119 Bellflower Road, Cleveland, OH 44106, USA
*
rms246@case.edu; rshereme@gmail.com
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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

QuantityQualityExperimentIncentivesReal effortLoss aversionD24J24J31J41

Information

Type
Original Paper
Information
Experimental Economics , Volume 21 , Issue 2 , June 2018, pp. 292 - 315
Copyright
Copyright © 2017 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (doi:https://doi.org/10.1007/s10683-017-9544-1) contains supplementary material, which is available to authorized users.

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