You are a personnel manager at a ball-bearing factory. You are considering two schemes to motivate your employees during a period of particularly brisk business. In Scheme A, you tell your employees, "If you increase your output by 10%, I will give you a $500 bonus at the end of the month." In Scheme B, you tell your employees, "I am giving you a $500 bonus. But if you do not achieve 10% growth by the end of the month, I will withdraw it."
a. If your employees are completely rational, will they be motivated more by Scheme A, Scheme B, or will both schemes motivate them equally?
b. If your employees are swayed by the endowment effect, which scheme is likely to be most effective in motivating them? Explain your answer.
c. Discuss the interplay of the endowment effect and framing bias inherent in this problem.