Performance thresholds, effort and risk-taking

We study, theoretically and experimentally, the impact of performance thresholds on effort and risk-taking. Our theory predicts that thresholds typically increase effort provision, but that the magnitude of this increase varies non-monotonically with the threshold level. For risk-taking, the effects are positive for high thresholds and negative for low thresholds. We characterize these patterns through the subtle interplay between effort and risk, which transition from complements to substitutes as thresholds become more demanding. Our experiment (N=1092) supports the theoretical predictions, showing that high thresholds raise both effort and risk-taking, whereas more moderate thresholds raise effort but lower risk-taking. Importantly, the experiment sheds light on the crucial role of individual heterogeneity: because individuals have different baseline performances, the same threshold can be perceived as high by some and low by others, producing opposite behavioral responses. The analysis highlights that effective threshold design must understand not only how thresholds shape effort and risk-taking, but also the characteristics of the targeted population.