An Experimental Investigation of the ‘Tenuous Trade-off’ between Risk and Incentives in Organizations

Subhasish M. Chowdhury, Alexandros Karakostas

Research output: Contribution to journalArticle

2 Downloads (Pure)

Abstract

We investigate experimentally the relationship between risk and incentives in a principal–agent setting. In contrast to the existing empirical literature that describes such relationship as ‘tenuous’ or inconclusive, we find a clear negative relationship—supporting the prediction of the standard theoretical model. Specifically, we find that principals reduce the size of the offered piece rates with an increase in risk and instead provide positive fixed wages. Furthermore, we find no relationship between the variance in the performance and the effort choice of the agent, and a strong positive relationship between the effort choice of the agents and the offered piece rates as well as fixed wage, suggesting positive reciprocity. Finally, we find evidence of social projection by the principals regarding the agents’ degree of risk aversion.
Original languageEnglish
Number of pages38
JournalTheory and Decision
Early online date18 Jun 2019
DOIs
Publication statusPublished - 2019

Cite this

@article{09e3389913c84727b25d67c31dfba3e7,
title = "An Experimental Investigation of the ‘Tenuous Trade-off’ between Risk and Incentives in Organizations",
abstract = "We investigate experimentally the relationship between risk and incentives in a principal–agent setting. In contrast to the existing empirical literature that describes such relationship as ‘tenuous’ or inconclusive, we find a clear negative relationship—supporting the prediction of the standard theoretical model. Specifically, we find that principals reduce the size of the offered piece rates with an increase in risk and instead provide positive fixed wages. Furthermore, we find no relationship between the variance in the performance and the effort choice of the agent, and a strong positive relationship between the effort choice of the agents and the offered piece rates as well as fixed wage, suggesting positive reciprocity. Finally, we find evidence of social projection by the principals regarding the agents’ degree of risk aversion.",
author = "Chowdhury, {Subhasish M.} and Alexandros Karakostas",
year = "2019",
doi = "10.1007/s11238-019-09711-w",
language = "English",
journal = "Theory and Decision",
issn = "0040-5833",
publisher = "Springer Verlag",

}

TY - JOUR

T1 - An Experimental Investigation of the ‘Tenuous Trade-off’ between Risk and Incentives in Organizations

AU - Chowdhury, Subhasish M.

AU - Karakostas, Alexandros

PY - 2019

Y1 - 2019

N2 - We investigate experimentally the relationship between risk and incentives in a principal–agent setting. In contrast to the existing empirical literature that describes such relationship as ‘tenuous’ or inconclusive, we find a clear negative relationship—supporting the prediction of the standard theoretical model. Specifically, we find that principals reduce the size of the offered piece rates with an increase in risk and instead provide positive fixed wages. Furthermore, we find no relationship between the variance in the performance and the effort choice of the agent, and a strong positive relationship between the effort choice of the agents and the offered piece rates as well as fixed wage, suggesting positive reciprocity. Finally, we find evidence of social projection by the principals regarding the agents’ degree of risk aversion.

AB - We investigate experimentally the relationship between risk and incentives in a principal–agent setting. In contrast to the existing empirical literature that describes such relationship as ‘tenuous’ or inconclusive, we find a clear negative relationship—supporting the prediction of the standard theoretical model. Specifically, we find that principals reduce the size of the offered piece rates with an increase in risk and instead provide positive fixed wages. Furthermore, we find no relationship between the variance in the performance and the effort choice of the agent, and a strong positive relationship between the effort choice of the agents and the offered piece rates as well as fixed wage, suggesting positive reciprocity. Finally, we find evidence of social projection by the principals regarding the agents’ degree of risk aversion.

U2 - 10.1007/s11238-019-09711-w

DO - 10.1007/s11238-019-09711-w

M3 - Article

JO - Theory and Decision

JF - Theory and Decision

SN - 0040-5833

ER -