6533b830fe1ef96bd129714b
RESEARCH PRODUCT
Revisiting the Trade-off Between Risk and Incentives: The Shocking Effect of Random Shocks?
Roberto Hernán-gonzálezBrice Corgnetsubject
Strategy and Managementmedia_common.quotation_subjectLaboratory experimentsManagement Science and Operations ResearchTrade-offBehavioral economicsMicroeconomicsloss aversionLoss aversion0502 economics and businessEconomics050207 economicsFunction (engineering)Empirical evidenceBaseline (configuration management)ComputingMilieux_MISCELLANEOUSmedia_common050208 financeEarningsPublic economicsIncentive theory05 social sciences[SHS.ECO]Humanities and Social Sciences/Economics and FinanceIncentive8. Economic growth[SHS.GESTION]Humanities and Social Sciences/Business administrationPrincipal–agent modelsdescription
Despite its central role in the theory of incentives, empirical evidence of a trade-off between risk and incentives remains scarce. We reexamine this trade-off in a workplace lab environment and find that, in line with theory, principals increase fixed pay while lowering performance pay when the relationship between effort and output is noisier. Unexpectedly, agents produce substantially more in the noisy environment than in the baseline despite weaker incentives. In addition, principals’ earnings are significantly higher in the noisy environment. We show that these findings can be accounted for when agents maximize a non-CARA utility function or when they exhibit loss aversion. Data and the online appendix are available at https://doi.org/10.1287/mnsc.2017.2914 . This paper was accepted by Uri Gneezy, behavioral economics.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2019-03-01 |