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Loss Aversion and the Quantity-Quality Tradeoff

Rubin, Jared and Samek, Anya and Sheremeta, Roman (2016): Loss Aversion and the Quantity-Quality Tradeoff.

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Abstract

Firms face an optimization problem that requires a maximal quantity output given a quality constraint. How firms should incentivize quantity and quality to meet these dual goals remains an open question, potentially due to limitations of field data. We provide a theoretical model and conduct an experiment in which participants are paid for both quantity and quality of a real effort task. Consistent with the theoretical predictions, higher quality incentives encourage participants to shift their attention from quantity to quality, and higher quality incentives reduce inefficient decision-making. We also observe behavioral components in responsiveness to the quality incentive.

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