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REFERENCE POINTS & EFFORT PROVISION
JOHANNES ABELER, ARMIN FALK, LORENZ GOETTE, AND DAVID HUFFMAN
LUCAS BEBER
26.06.2017
Experimental and Behavioral Economics
2017 Summer Semester
Professor: Dr. Dorothea Kübler
CONTENTS
 General Problem
 Experiment
 Expectations
 Results
 Conclusion
 References
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EXPERIMENTAL AND BEHAVIORAL ECONOMICS 2017
GENERAL PROBLEM
 The article analyses whether expectation could be seen as a prospect theory’s reference point;
 “What people expect could affect how they feel about what actually occurs”;
 To illustrate: Imagine two identical workers. One expected a salary increase of ten percent but
receives an increase of only five percent. The other receives the same five percent wage increase but
had not expected it. The change in income is the same for both workers, but the first one feels less
satisfied;
 The experiment plays around with the earning expectation of workers and correlate it with the
amount of effort they dedicate to a task;
 Therefore they can state that the effort provision is influenced by what is expected to earn.
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EXPERIMENTAL AND BEHAVIORAL ECONOMICS 2017
EXPERIMENT
 Subjects work on a tedious, repetitive task which was to count ones and zeros on a table. For each
counted table, they get 20 cents;
 They can work for a maximum of 60 minutes and can stop whenever they want;
 The payment is only claimed after the subject chose to stop and is a 50% chance to be either what
they worked for (accumulated earnings) or a fixed payment (which is told before the experiment
begins);
 Two expectation approaches: LO, with a fixed payment of 3 euros; and HI, with a 7 euros fixed
payment.
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EXPERIMENTAL AND BEHAVIORAL ECONOMICS 2017
EXPECTATIONS
Average effort in the HI treatment should be higher than in the LO treatment
 Reference dependence moves effort from above and below towards the fixed payment; the more loss
averse a subject is the closer they should stop to the fixed payment;
 Thus, there will tend to be clustering of stopping decisions exactly at the fixed payment value;
 When the accumulated earnings are above the fixed payment, the incentive effect of loss aversion is
reversed: because earnings above it can be lost in case the subject receives the fixed payment;
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EXPERIMENTAL AND BEHAVIORAL ECONOMICS 2017
RESULTS
 RESULT 1: In the LO treatment with fixed payment f = 3 euros, subjects stop working after
accumulating 7.37 euros on average. In the HI treatment with f = 7 euros, subjects stop on average at
9.22 euros;
 RESULT 2: The probability to stop when accumulated earnings are equal to the amount of the fixed
payment is higher compared to the same earnings level in the other treatment. The modal choice in
both treatments is to stop exactly when accumulated earnings equal the fixed payment.
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RESULTS
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EXPERIMENTAL AND BEHAVIORAL ECONOMICS 2017
CONCLUSION
 Subjects work more when expectations are high, and many subjects stop when piece rate earnings
equal the fixed payment;
 Results support models which assume the reference point to be formed by expectations;
 Findings in the field provided controlled evidence that expectations can in fact act as a reference point,
and can affect effort provision.
 The more you expect, the more you put effort.
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EXPERIMENTAL AND BEHAVIORAL ECONOMICS 2017
REFERENCES
 Abeler, J., Falk, A., Götte, L., Huffman, D. (2011). Reference Points and Effort Provision. American Economic
Review, 101: 470-492.
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EXPERIMENTAL AND BEHAVIORAL ECONOMICS 2017
THANK YOU FOR YOUR ATTENTION!
ANY QUESTIONS?
LUCAS BEBER
Experimental and Behavioral Economics
2017 Summer Semester
Professor: Dr. Dorothea Kübler