Gain versus loss contracts: Does contract framing affect agents’ reciprocity?

von Bieberstein, Frauke; Essl, Andrea; Friedrich, Kathrin (2020). Gain versus loss contracts: Does contract framing affect agents’ reciprocity? Economics letters, 187, p. 108846. Elsevier 10.1016/j.econlet.2019.108846

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Loss contracts are rarely observed in practice, although research suggests that they induce higher effort compared to gain contracts. We experimentally examine one potential reason for this scarcity: agents’ reciprocity toward the principal might be negatively affected by loss contracts. First, agents worked on a real effort task under either a gain or a loss contract. Second, rincipals and agents played a trust game. We find that loss contracts induce more effort, and thus a higher payoff for the principal in the real effort task. However, we do not find a spillover effect of contract framing in the trust game. Differences in reciprocity are small in size and not significant. Thus, they cannot explain the rare use of loss contracts in practice.

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