Dominated Penalty Contracts
Standard economic models suggest rational agents reject contracts with wage penalties for target misses without extra bonus upside, yet present-biased workers leverage them to force productivity.
Picture this
A dominated contract is like giving $10 to a friend with instructions to burn it if you miss your daily study goal, without getting any extra money if you complete it. Although mathematically inferior to a standard contract, the threat of losing money creates immediate panic that overrides procrastination.
What the evidence says
Rigid firm-imposed target penalties caused workers to miss targets 8.6% to 14.1% of the time without increasing net earnings, whereas voluntary target selection reduced the target miss rate to 2.6% and increased net worker earnings by 3%.
- Who
- N = 102 data entry workers in Mysore, India.
- How
- Randomized Controlled Trial (RCT) comparing standard piece rates (Rs. 0.03/field) against contracts with target quotas that cut piece-rate pay by 50% (Rs. 0.015/field) for failing to meet targets.
What to do
Design self-imposed penalty mechanisms rather than mandatory firm-wide quotas to leverage loss aversion without triggering high rates of costly target failure.
From the source
"If workers met their targets, they received the standard rate per field entered; if they fell short of the target, they received half the standard rate."
The Impact of Commitment Contracts on Workplace Productivity in India