Revisiting the Tradeoff between Risk and Incentives: The Shocking Effect of Random Shocks

Brice Corgnet and Roberto Hernán-González
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Roberto Hernán-González: University of Nottingham

Working Papers from Chapman University, Economic Science Institute

Abstract: Despite its central role in the theory of incentives, empirical evidence of a tradeoff between risk and incentives remains scarce. We reexamine this empirical puzzle in a controlled laboratory environment so as to isolate possible confounding factors encountered in the field. In line with the principal-agent model, we find that 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 lesser pay for performance. We show that this result can be accounted for by introducing agents’ loss aversion in the principal-agent model. Our findings call for an extension of standard agency models and for a reassessment of apparently inefficient management practices.

Keywords: Principal-agent models; incentive theory; loss aversion; laboratory experiments (search for similar items in EconPapers)
JEL-codes: C92 D23 D86 M54 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-exp, nep-hrm, nep-mfd and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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http://www.chapman.edu/research-and-institutions/e ... ipal-agent-paper.pdf

Related works:
Journal Article: Revisiting the Trade-off Between Risk and Incentives: The Shocking Effect of Random Shocks? (2019)
Working Paper: Revisiting the Trade-off Between Risk and Incentives: The Shocking Effect of Random Shocks? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:chu:wpaper:15-05

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