Influencing risk taking in competitive environments: an experimental analysis

Ivo Schedlinsky, Friedrich Sommer and Arnt Wöhrmann

Journal of Risk Finance, 2018, vol. 19, issue 4, 396-412

Abstract: Purpose - In the aftermath of the financial crisis, the influence of competitive compensation systems on employee risk taking has gained increasing attention. As the renouncement of such incentive schemes might entail severe disadvantages regarding employee motivation, standard setters have proposed adding nonmonetary instruments of control. This paper aims to examine the influence of two of the most common instruments: a risk-sensitizing code of conduct and justification. Design/methodology/approach - A laboratory experiment with 136 business students is conducted to test the hypotheses and answer the research question. The presence and absence of a risk-sensitizing code of conduct and a justification system is manipulated between subjects. The experiment consists of ten rounds, with round as the third factor manipulated within subjects. Findings - Consistent with the paper’s hypothesis and the underlying theory, both instruments are found to offset higher risk taking. The paper shows that the motivation of individuals triggered by justification depends on a risk-sensitizing code of conduct, and insights into the psychological mechanisms behind the findings are provided. Practical implications - As justification is considered more costly than a risk-sensitizing code of conduct, establishing the latter instead of the former seems preferable in most situations. However, if organizational citizenship behavior is unlikely to evolve, justification can substitute it for managing employee risk taking. Originality/value - This paper identifies the risk-sensitizing code of conduct as an informal instrument of control for managing risk taking. Prior research mainly focuses on potentially more costly formal instruments of control.

Keywords: Tournament; Risk taking; Code of conduct; Justification; Risk behaviour; M14; M41; M50 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:jrf-11-2017-0193

DOI: 10.1108/JRF-11-2017-0193

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