Effects of Ambiguous Common Uncertainty on Employee Preference for Relative Performance Contracts

Ge Bai and Ranjani Krishnan
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Ge Bai: Carey Business School, The Johns Hopkins University, USA
Ranjani Krishnan: Department of Accounting & Information Systems, Broad College of Business, Michigan State University, USA

The Japanese Accounting Review, 2016, vol. 6, 65-93

Abstract: We distinguish ambiguous common uncertainty (with unknown probability distribution) from risky common uncertainty (with known probability distribution) and examine how employee preference for relative performance contracts differs between the two conditions. Using economics and psychology theory in decision making under uncertainty, we hypothesize that (i) preference for relative performance contracts is low (high) when common uncertainty is ambiguous (risky); and (ii) confidence mediates the relation between ambiguity and preference for relative performance contracts. Results from a controlled laboratory experiment support these predictions. A follow-up experiment provides evidence that the direct effect of ambiguity and the mediating effect of confidence disappear if the contract is based on independent performance measures. Our study contributes to the literature on performance measurement, employee contract preference, and decision making under uncertainty.

Keywords: Contract Preference; Relative Performance; Ambiguity Aversion (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2016
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