Making Reference-Dependent Preferences: Evidence from Door-to-Door Sales

Abstract

This paper uses data from a door-to-door sales company and an online experiment to examine the relationship between reference-dependent daily labor supply and long-run goal achievement. In the sales data, I show that daily labor supply kinks downward at a worker’s expectations and that these expectations directly correspond to bonuses paid at the end of the sales season. The bonuses induce workers to adopt long-run targets and subsequently distribute these into internalized daily goals around which they exhibit loss aversion. These dynamics explain why non-linear payment schemes increase performance: workers change their short-run behavior in response to long-run performance targets. The online experiment confirms a causal interpretation of this relationship between bonuses and short-run behavior and supports the idea that short-run reference dependence can be `made’ or induced by firms by adopting non-linear compensation schemes. These dynamics increase worker output and firm profitability and can explain why non-linear compensation is so popular in the labor market.

Samuel Dodini

Senior Research Economist

My broad research interests include empirical explorations of the economics of labor markets, incorporating insights from behavioral economics, occupational licensing, monopsony power, education, public finance, and urban economics.