Revisiting the Trade-off Between Risk and Incentives: The Shocking Effect of Random Shocks?

Brice Corgnet and Roberto Hernán-González ()
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Roberto Hernán-González: Université Bourgogne Franche-Comté, Burgundy School of Business–CEREN (EA 7477), 21000 Dijon, France
Authors registered in the RePEc Author Service: Roberto Hernán González

Management Science, 2019, vol. 65, issue 3, 1096-1114

Abstract: Despite its central role in the theory of incentives, empirical evidence of a trade-off between risk and incentives remains scarce. We reexamine this trade-off in a workplace lab environment and find that, in line with theory, 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 weaker incentives. In addition, principals’ earnings are significantly higher in the noisy environment. We show that these findings can be accounted for when agents maximize a non-CARA utility function or when they exhibit loss aversion.

Keywords: principal–agent models; incentive theory; loss aversion; laboratory experiments (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (22)

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https://doi.org/10.1287/mnsc.2017.2914 (application/pdf)

Related works:
Working Paper: Revisiting the Trade-off Between Risk and Incentives: The Shocking Effect of Random Shocks? (2019)
Working Paper: Revisiting the Tradeoff between Risk and Incentives: The Shocking Effect of Random Shocks (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:65:y:2019:i:3:p:1096-1114

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