The Effects of Bonus vs. Penalty Incentives in a Laboratory Market Setting

• In Event: Decisions and informational judgements and their effects on a company's results
  In Paper Session: Decisions and Informational Judgements and Their Effects on a Company's Results

Abstract

Prior research (Frederickson and Waller 2005, Luft 1994, Hannan et al. 2005) has shown in a nonmarket laboratory setting that employees are more likely to accept budget-based contracts containing an incentive described as a bonus than contracts with identical payoffs described in penalty terms. Each of these incentive contracts has exactly two potential payoffs; which payoff a given subject receives depends on whether or not the subject’s task performance meets (or exceeds) the budget. The present research tests whether a preference for bonus over penalty incentives characterizes equilibrium in a laboratory market setting. Market results are consistent with the prediction of no significant bonus preference evident at equilibrium. The study also contributes an original two-step approach to examining the effects of individual decision biases on market outcomes.

Author

• Lou Xavier Orchard, Clayton State University