The effect of ambiguity aversion on reward scheme choice

Christian Kellner () and Gerhard Riener

Economics Letters, 2014, vol. 125, issue 1, 134-137

Abstract: We test the implications of ambiguity aversion in a principal–agent problem with multiple agents. Models of ambiguity aversion suggest that, under ambiguity, comparative compensation schemes may become more attractive than independent wage contracts. We test this by presenting agents with a choice between comparative reward schemes and independent contracts, which are designed such that under uncertainty about output distributions (that is, under ambiguity), ambiguity averse agents should typically prefer comparative reward schemes, independent of their degree of risk aversion. We indeed find that the share of agents who choose the comparative scheme is higher under ambiguity.

Keywords: Ambiguity aversion; Comparative compensation schemes; Ellsberg urn; Contract design (search for similar items in EconPapers)
JEL-codes: D01 D03 D81 M55 (search for similar items in EconPapers)
Date: 2014
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Related works:
Working Paper: The effect of ambiguity aversion on reward scheme choice (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:125:y:2014:i:1:p:134-137

DOI: 10.1016/j.econlet.2014.08.025

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