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Risk preferences and contract choices

Author

Listed:
  • Jean-Louis Bago

    (Ministry of Revenue, Government of Québec and CRREP (Laval University))

  • Bruce Shearer

    (Laval University, CRREP, CIRANO and IZA)

Abstract

We conducted a series of field experiments to investigate the ability of experimentally measured risk preferences to predict the contractual choices of workers in the real labour market. In a first set of experiments we twice measured workers’ risk preferences using the lottery approach of Holt and Laury (Am Econ Rev 92(5):1644–165, 2002). These workers subsequently participated in a contract-choice experiment, making 12 decisions. For each decision, the worker chose between his/her regular piece-rate contract and a particular fixed wage contract, each distinguished by the level of the fixed wage. One of the twelve decisions was then chosen at random and the worker was paid according to his/her choice for that decision over a period of two working days. We estimate the effect of risk preferences on contractual choices, controlling for measurement error and worker ability. Risk preferences effectively predict contract choices—risk-averse workers are more likely to select fixed-wage contracts. High-ability workers prefer piece-rates.

Suggested Citation

  • Jean-Louis Bago & Bruce Shearer, 2022. "Risk preferences and contract choices," Experimental Economics, Springer;Economic Science Association, vol. 25(5), pages 1374-1398, November.
    • Handle: RePEc:kap:expeco:v:25:y:2022:i:5:d:10.1007_s10683-022-09768-5
    DOI: 10.1007/s10683-022-09768-5
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    More about this item

    Keywords

    Risk preferences; Incentives; Contracts; Sorting; Field experiments;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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