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Is Cash King? A Field Intervention on Mental Accounting in a Salesforce

Wednesday 12 February 2014, 4.30pm - 6.00pm
5.21, New Academic Building, LSE

Om Narasimhan

Professor of Marketing, Department of Management, LSE  

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The fungibility of money, along with its function as a medium of exchange, gives monetary transactions pride of place in neoclassical theories of economics. However, a growing number of laboratory studies and anecdotal field evidence (appealing to theories of mental accounting) have shown that consumers’ willingness to spend an additional unit of wealth depends upon the sources and categories of wealth, thus throwing serious doubt on the presumed fungibility of cash. This paper extends the work to examining the fungibility of money in the context of salesperson effort. Given that firms desire to design the least cost pay basket to evoke a given level of effort, it is important to i) identify whether salespersons differ in their response to disparate forms of compensation, ii) quantify the impact of different sources of wealth, and iii) explore the underlying mechanisms at play.

We seek to achieve the above objectives using a multi-method empirical approach. In particular, we use a field intervention, reduced form estimation to derive initial insights from the intervention, a structural model to uncover the differential response to cash versus non-cash compensation, and a survey of salespeople to pinpoint the precursors of separate budgets. We find converging evidence that salespeople maintain separate accounts for cash and non-cash bonuses, dispelling the neo-classical expectation that favors cash as king.



Om Narasimhan