Performance Pay and Risk Aversion

Christian Grund () and Dirk Sliwka

No 2012, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: A main prediction of agency theory is the well known risk-incentive trade-off. Incentive contracts should be found in environments with little uncertainty and for agents with low degrees of risk aversion. There is an ongoing debate in the literature about the first trade-off. Due to lack of data, there has so far been hardly any empirical evidence about the second. Making use of a unique representative data set, we find clear evidence that risk aversion has a highly significant and substantial negative impact on the probability that an employee’s pay is performance contingent.

Keywords: risk; incentives; agency theory; risk aversion; performance appraisal; pay for performance; GSOEP (search for similar items in EconPapers)
JEL-codes: J33 M52 D80 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-upt
Date: 2006-03
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Working Paper: Performance Pay and Risk Aversion (2006)
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