Template-Type: ReDIF-Paper 1.0
Author-Name: Lucia Marchegiani 
Author-X-Name-First: Lucia
Author-X-Name-Last: Marchegiani
Author-Email: lmarchegiani@uniroma3.it
Author-Workplace-Name: University of Rome 3
Author-Name: Tommaso Reggiani 
Author-X-Name-First: Tommaso 
Author-X-Name-Last: Reggiani
Author-Email: t.reggiani@lumsa.it
Author-Workplace-Name: LUMSA University
Author-Name: Matteo Rizzolli 
Author-X-Name-First: Matteo 
Author-X-Name-Last: Rizzolli
Author-Email: m.rizzolli@lumsa.it
Author-Workplace-Name: LUMSA University
Title: Loss Averse Agents and Lenient Supervisors in Performance Appraisal

Abstract: A consistent empirical literature shows that in many organizations supervisors systematically overrate their employees’ performance. Such leniency bias is at odds with the standard principalagent model and has been explained with causes that range from social interactions to fairness concerns and to collusive behavior between the supervisor and the agent. We show that the principal-agent model, extended to consider loss-aversion and reference-dependent preferences, predicts that the leniency bias is comparatively less detrimental to effort provision than the severity bias. We test this prediction with a laboratory experiment where we demonstrate that failing to reward deserving agents is significantly more detrimental than rewarding undeserving agents. This offers a novel explanation as to why supervisors tend to be lenient in their appraisals. 

Length: 36 pages
Creation-Date: 2016-07
Publication-Status: 
File-URL: https://repec.lumsa.it/wp/wpC11.pdf
File-Format: Application/pdf
Number: wpC11
Classification-JEL: C91, M50, J50
Keywords: Performance appraisal, TypeI and TypeII errors, Leniency bias, Severity bias, Economic experiment, Loss aversion, Reference-dependent preferences.
Handle: RePEc:lsa:wpaper:wpC11