Despite substantial evidence for the effectiveness of monetary incentives, some experiments have shown that high-powered incentives might lead to lower performance than lesser incentives. This study explores whether firms have means to counter these potential negative effects. Building on a standard experimental design identifying the drawbacks of large-stake rewards, it shows that when workers either self-select into the task or have prior practice, high-powered incentives lead to higher average performance than a smaller reward. This effect is driven mainly by selection and practice increasing the share of workers who respond positively to high-powered incentives. These results suggest that firms have natural instruments to deal with the potential adverse effects of high-powered incentives.

This paper uses a laboratory experiment to show that principals can defer all incentives for present effort to future payments---and thus pay fixed wages---and still motivate workers at the least cost whenever outcomes are observable. This result contrasts with the prediction of the classical moral hazard model, according to which future and present payments must be made contingent on present outcomes to induce effort at the least cost. Even though risk aversion cannot explain this result, I estimate an expectation-based reference-dependent model to show that it is consistent with loss aversion.

This paper studies the intertemporal allocation of incentives in a repeated moral hazard model where agents experience utility from changes in their wage and effort expectations. In contrast to the standard prediction, under mild restrictions over the utility function, uncertainty is fully deferred into future payments allowing the principal to pay present fixed wages. Despite the intertemporal allocation of incentives is non-standard, the optimal contract is well behaved, as important features of the contract with classical preferences---no rents to the agent, conditions to achieve first-best cost and non-optimality of random contracts---still hold.

This paper investigates the dynamic effects of price promotions in a retail setting through the use of a large-scale field experiment which involved varying the promotion depths of 170 products across 17 categories in 10 supermarkets of a major retailer in Chile. In the intervention phase of the experiment, customers were exposed to a promotion schedule that differed only on promotional depths: treated customers were exposed to deep discounts (approximately 30%), whereas control customers were exposed to shallow discounts (approximately 10%). In the subsequent measurement phase, the promotion schedule held discount levels constant across groups. We find that treated customers were 22.4% more likely to buy promoted items than their control counterparts, despite facing the same promotional deals. Strikingly, the magnitude of the dynamic effects of price promotions (when promotional depths are equal across conditions) is 61% of the promotional effects induced by offering shallow vs. deep discounts during the intervention phase. The result is robust to other concurrent dynamic forces, including consumer stockpiling behavior and state dependence. We use the experimental variation and historical promotional activities to inform a demand-side model in which consumers search for deals, and a supply-side model in which firms compete for those consumers. We find that small manufacturers can benefit from heightened promotion sensitivity by using promotions to induce future consideration. However, when unit margins are high, heightened promotion sensitivity leads to fierce competition, making all firms worse off.

This paper studies the temporal path of subjective probability assessments. A reference-dependent agent who experiences utility from anticipation and from changes in this anticipatory emotion makes utility-maximizing assessments about his likelihood of success in a future lottery. Consistent with the empirical evidence, the model predicts that if the lottery is sufficiently valuable, optimism decreases as the payoff date approaches. Intuitively, as time goes by, last-period expected disappointment becomes increasingly important relative to the joy of anticipating a favorable outcome. Applying the model to the optimal timing of productivity bonuses, I find that a decreasing path of beliefs reduces the cost of providing incentives. Thus, optimal bonuses are sizable and are not frequently offered.

Social learning has been shown to be more prevalent within organizations rather than across. To explain this regularity, prior research points mostly to structural conditions prevalent inside organizations, such as proximity or organization-specific language. We complement these explanations with an individual-based view: people display a behavioral disposition for extit{high-fidelity} social learning (i.e., copying with high accuracy from others) when learning from members of their own organization (and not from outside sources). First, we use a simple formal model from cultural evolution to justify why this behavioral disposition would have evolved to become a part of our norms and/or psychology. Then, we use a pre-registered field experiment to provide empirical support for this individual-level disposition. In our experiment, we document a significant increase in social learning when doing so from fellow organizational members, of which 75\% can be attributed to extit{high-fidelity} social learning. This effect trumps prestige-biased social learning and, consistent with a behavioral predisposition, it seems to operate through sentiments and not reason.

We study a largely neglected aspect of the design of gift-exchange field experiments: the surprising nature of the treatment group wage raise. We show that if reciprocal workers have expectations-based reference-dependent preferences and they expect to work at the market wage, a surprising gift can boost effort to the extent of increasing profits. The power of unanticipated gifts, however, is tighter in repeated interactions in which workers can update beliefs rationally: since workers negatively reciprocate expected but unfulfilled gifts, initially unanticipated gifts can induce long-term profit losses if they lead workers to expect further gifts probabilistically. We relate our predictions to the existing evidence and study the model’s recommendations for the design of further field experiments.