Sam Dodini, Cornell University - Practice Job Talk

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

Abstract: This paper uses novel, comprehensive data from a pest control sales company to examine how principals affect reference dependence in a principal-agent setting. I provide evidence that lump-sum bonuses incentivize workers to set specific long-run expectations, which workers translate to daily performance references consistent with theories of goal-setting. Daily labor supply kinks significantly downward at candidate references during normal workdays. However, during individual rank-order tournaments, there is no such kink, and labor supply is notably flat across the reference. This is attributable to workers anchoring their labor supply to a new reference--their opponent--consistent with tournament theory. Individual rank-order tournaments strategically break reference dependence and increase labor supply in the gain domain. Through their choice of contract structure and short-run incentives, firms exert influence over the references workers set and therefore their daily labor supply choices.