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Does bonus cap curb risk taking? An experimental study of relative performance pay and bonus regulation

Qun Harris (), Misa Tanaka () and Emma Soane ()
Additional contact information
Qun Harris: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Misa Tanaka: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Emma Soane: London School of Economics and Political Science

No 882, Bank of England working papers from Bank of England

Abstract: We conducted a lab experiment with 253 participants to examine how constraints on bonus akin to bonus regulations, such as bonus cap and malus, could affect individuals’ risk-taking in the presence of relative performance pay. Participants took greater risks when bonus was linked to investment performance relative to that of their peers (relative performance pay) than when it depended on their own performance only. In the absence of relative performance pay, bonus cap and malus reduced risk-taking. With relative performance pay, the risk-mitigating effects of bonus cap and malus were significantly weakened; but participants took less risk when bonus was made conditional on their team avoiding a loss.

Keywords: Bonus cap; malus; bonus regulation; risk choice (search for similar items in EconPapers)
JEL-codes: C91 G28 G40 J31 J33 M52 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2020-08-14
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-hrm and nep-lma
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0882

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