Uncertainty, risk, and incentives: theory and evidence

Zhiguo He (), Si Li (), Bin Wei and Jianfeng Yu
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Si Li: https://www.wlu.ca/academics/faculties/lazaridis-school-of-business-and-economics/faculty-profiles/si-li/index.html

No 2013-18, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Uncertainty has qualitatively different implications than risk in studying executive incentives. We study the interplay between profitability uncertainty and moral hazard, where profitability is multiplicative with managerial effort. Investors who face greater uncertainty desire faster learning, and consequently offer higher managerial incentives to induce higher effort from the manager. In contrast to the standard negative risk-incentive trade-off, this \"learning-by-doing\" effect generates a positive relation between profitability uncertainty and incentives. We document empirical support for this prediction.

Date: 2013
New Economics Papers: this item is included in nep-cbe, nep-cta and nep-hrm
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Uncertainty, Risk, and Incentives: Theory and Evidence (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2013-18

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