Abeler et al. (2011) on Reference Points and Effort Provision

Johannes Abeler, Armin Falk, Lorenz Goette, and David Huffman, “Reference Points and Effort Provision.” American Economic Review 101: 470-492, April 2011.

• An experiment is conducted in which people engage in a tedious and pointless task, but one that requires some attention. 

• The participants do not know with certainty how much they will be paid. They know that they will either receive a fixed fee (of which they are informed), or their accumulated, piece-rate earnings, each with equal probability. 

• The experiment varied only the fixed fee, which is either low (3 euros) or high (7 euros). The relevant choice for the worker is how long to work. 

• For an expected utility maximizer, the size of the fixed fee will not influence the decision about how long to work. (This claim requires the assumption that utility is separable in money and effort.) Even for a prospect theory decider, if the reference point is the status quo prior to the experiment, the size of the fixed fee will not influence the decision about how long to work. 

• If the worker is a prospect theory decider whose reference point is determined by the fixed fee – perhaps by fixing expectations of earnings – then the fixed fee size will influence the amount of work, as losses relative to the fixed fee will be quite aversive. 

• Sure enough, the participants worked longer when the fixed fee was higher. Further, the most common stopping point occurred when the accumulated earnings equaled the fixed fee, so the payment involved no uncertainty at all. 

• Workers whose responses to a series of questions suggest that they are particularly loss averse are also relatively more likely to stop working at the no-risk point.