Incentive design for reference-dependent preferences

We investigate the optimal design of incentives when agents exhibit reference dependence. The theoretical framework of this paper incorporates the most prominent accounts of reference-dependent preferences and the most frequently used reference point rules. Such a general treatment of preferences al...

Full description

Saved in:
Bibliographic Details
Published in:Journal of economic behavior & organization 2024-05, Vol.221, p.493-518
Main Author: González-Jiménez, Víctor
Format: Article
Language:English
Subjects:
Bonuses
Contract theory
Loss aversion
Principal-agent models
Reference dependence
Citations: Items that this one cites
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We investigate the optimal design of incentives when agents exhibit reference dependence. The theoretical framework of this paper incorporates the most prominent accounts of reference-dependent preferences and the most frequently used reference point rules. Such a general treatment of preferences allows us to characterize sufficient conditions on preference for the optimality of bonuses. We find that the optimal contract must include a bonus when agents suffer from loss aversion or exhibit sufficiently strong diminishing sensitivity. Moreover, we show that such a result holds when the reference point is either exogenous or deterministic. This paper provides a rationale for incentive schemes including bonuses grounded in preference.
ISSN:0167-2681
1879-1751
DOI:10.1016/j.jebo.2024.03.005