Performance Pay and Risk Aversion

Christian Grund and Dirk Sliwka

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: A main prediction of agency theory is the well known risk-incentive trade-off. Incentive contracts should be found in environments with little uncertainty and for agents with low degrees of risk aversion. There is an ongoing debate in the literature about the first trade-off. Due to lack of data, there has so far been hardly any empirical evidence about the second. Making use of a unique representative data set, we find clear evidence that risk aversion has a highly significant and substantial negative impact on the probability that an employee's pay is performance contingent.

Keywords: Agency theory; GSOEP; Incentives; Pay for performance; Performance appraisal; Risk; Risk aversion (search for similar items in EconPapers)
JEL-codes: D80 J33 M52 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-bec, nep-fmk, nep-lab and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Working Paper: Performance Pay and Risk Aversion (2006)
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