Sorting, Incentives and Risk Preferences: Evidence from a Field Experiment

Charles Bellemare () and Bruce S. Shearer ()
Additional contact information
Bruce S. Shearer: Université Laval

No 2227, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The, often observed, positive correlation between incentive intensity and risk has been explained in two ways: the presence of transaction costs as determinants of contracts and the sorting of risk-tolerant individuals into firms using high-intensity incentive contracts. The empirical importance of sorting is perhaps best evaluated by directly measuring the risk tolerance of workers who have selected into incentive contracts under risky environments. We use experiments, conducted within a real firm, to measure the risk preferences of a sample of workers who are paid incentive contracts and face substantial daily income risk. Our experimental results indicate the presence of sorting; Workers in our sample are risk-tolerant. Moreover, their level of tolerance is considerably higher than levels observed for samples of individuals representing broader populations. Interestingly, the high level of risk tolerance suggests that both sorting and transaction costs are important determinants of contract choices when workers have heterogeneous preferences.

Keywords: risk aversion; sorting; incentive contracts; field experiments (search for similar items in EconPapers)
JEL-codes: C93 J33 M52 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2006-07
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Published - published in: Economics Letters, 2010, 108 (3), 345-348

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Related works:
Journal Article: Sorting, incentives and risk preferences: Evidence from a field experiment (2010)
Working Paper: Sorting, Incentives and Risk Preferences: Evidence from a Field Experiment (2006)
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