Loss Aversion and Effort: Evidence from a Field Experiment

This paper contributes new evidence to a recent controversy in labor economics: Is la-bor supply affected by sensations of gains and losses relative to a narrowly-defined earnings target? We report evidence from a field experiment that exogenously and temporarily ma-nipulates the progress of workers towards a possible earnings target, by randomly delaying subjects in their progress. We find that individuals who were delayed put in more effort. We also find that this effect is specific to the treatments in which we paid the subjects on a piece rate. In a control treatment with fixed wages, we find no effect that the subjects effort choices were affected by the productivity manipulations. This is inconsistent with a wide class of neoclassical utility functions. We argue that this is evidence that the individuals in the piece rate treatment were trying to catch up with the loss in output due to low produc-tivity. There are two models to explain this behavior: Reference-dependent preferences, or concave utility over narrowly defined outcomes. To further probe into the pattern, we also measure risk preferences of the individuals in an experiment involving risky payoffs. We find that the pattern of catching up after a delays is only present for individuals who behave in a risk-averse fashion in simple choice experiments. Furthermore, we find that the effect is concentrated among strongly risk-averse individuals, and not present, for moderately risk-averse individuals. This is evidence against concave utility, thus favoring reference-dependent preferences to explain our result