Paying and Incentivizing Agents with Reference-Dependent Preferences

We document behavioral reference-point effects in a personnel-economic context. Analyzing both survey data and administrative social-security records, we show that wage perceptions are subject to substantial discontinuities. Particularly, earning slightly below or slightly above salient wage thresholds (namely multiple of EUR 1,000 in the monthly gross wage) has markedly different effects on employee satisfaction, job loyalty, and employee effort. This has important consequences for human-resource management (HRM), as the documented behavioral bias must be taken into account when incentivizing employee behavior.