Incentive Design under Loss Aversion

Meza, David de; Webb, David C.

doi:10.1162/jeea.2007.5.1.66

Cited by 86 publications

(40 citation statements)

References 40 publications

(43 reference statements)

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“…In the case without delay, which proves to be more tractable than the setting with delay as well as the setting in the present paper, he solves for the welfare maximizing mechanism. Less closely related, de Meza and Webb (2007) consider incentive design under loss-aversion, Gill and Stone (2010) model a two-player rank-order tournament when agents are loss-averse, Carbajal and Ely (2016) study optimal price discrimination when a monopolist faces a continuum of consumers with reference-dependent preferences, Rosato (2014) proposes expectationsbased loss-aversion as an explanation for the "afternoon effect" observed in sequential auctions, and Karle and Peitz (2014) investigate firm strategy in imperfect competition.…”

Section: Related Literaturementioning

confidence: 99%

Bilateral Trade with Loss-Averse Agents

Benkert

2015

SSRN Journal

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We study the bilateral trade problem put forward by Myerson and Satterthwaite (1983) under the assumption that agents are loss-averse, using the model developed by Kőszegi and Rabin (2006, 2007). We show that the endowment effect increases the sellers information rent, and that the attachment effect reduces the buyer's information rent. Further, depending on the distribution of types, loss-aversion can reduce the severity of the impossibility problem. However, the result cannot be reversed. Turning to the design of optimal mechanisms, we show that in both revenue and welfare maximizing mechanisms the designer optimally provides the agents with full insurance in the money dimension and with partial insurance in the trade dimension. In fact, when the stakes are large, loss-aversion can eliminate trade altogether. We show that all results display robustness to the exact specification of the reference point and provide some results on general mechanism design problems.

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Section: Related Literaturementioning

confidence: 99%

Bilateral Trade with Loss-Averse Agents

Benkert

2015

SSRN Journal

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“…Anticipating this tournament outcome, the average income   = (  +   ) 2 seems to be a natural candidate for the reference point. Following Barberis et al (2001), DeMeza andWebb (2007), p. 70, andGill andStone (2010), we assume that a loss averse player's preferences can be described by a linearly kinked utility function: 5…”

Section: Part Ii: Loss Aversionmentioning

confidence: 99%

Relative performance pay in the shadow of crisis

Kräkel

Nieken

2015

European Economic Review

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We analyze whether incentives from relative performance pay are reduced or enhanced if a department is possibly terminated due to a crisis. Our benchmark model shows that incentives decrease in a severe crisis, but are boosted given a minor crisis since efforts are strategic complements in the former case but strategic substitutes in the latter one. We tested our predictions in a laboratory experiment. The results confirm the effort ranking but show that in a severe crisis individuals deviate from equilibrium significantly stronger than in other situations. This behavior contradicts the benchmark model and leads to a five times higher survival probability of the department. We develop a new theoretical approach that may explain players' behavior.

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“…Lemma 1 implies that the ratio θ(p 0 )/θ(p) for p 0 < p -and hence, volatility of market tightness -is lower than in the benchmark. 13 …”

Section: Long-term Contracts and Consumption Smoothingmentioning

confidence: 99%

Reference Dependence and Labor Market Fluctuations

Eliaz

Spiegler

2014

NBER Macroeconomics Annual

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We incorporate reference-dependent worker behavior into a search-matching model of the labor market, in which firms have all the bargaining power and productivity follows a log-linear AR(1) process. Motivated by Akerlof (1982) and Bewley (1999), we assume that existing workers' output falls stochastically from its normal level when their wage falls below a "reference point", which (following Kőszegi and Rabin (2006)) is equal to their lagged-expected wage. We formulate the model game-theoretically and show that it has a unique subgame perfect equilibrium that exhibits the following properties: existing workers experience downward wage rigidity, as well as destruction of output following negative shocks due to layoffs or loss of morale; newly hired workers earn relatively flexible wages, but not as much as in the benchmark without reference dependence; market tightness is more volatile than under this benchmark. We relate these findings to the debate over the "Shimer puzzle" (Shimer (2005)).

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Incentive Design under Loss Aversion

Cited by 86 publications

References 40 publications

Bilateral Trade with Loss-Averse Agents

Bilateral Trade with Loss-Averse Agents

Relative performance pay in the shadow of crisis

Reference Dependence and Labor Market Fluctuations

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