Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence
AbstractThe application of the classical "linear" model of incentive pay to the case when the noise is multiplicative to effort generates two predictions for a given strength of incentives: 1) more risk-averse workers will put in less effort, and 2) setting a performance target will weaken the negative risk aversion--effort link. The data from a real-effort laboratory experiment involving 85 student participants support both these predictions. Implications of the model and empirical findings to the literature on, and practice of, personnel management are discussed.
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Bibliographic InfoPaper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2012-005-STR.
Date of creation: 20 Mar 2012
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risk aversion; incentive pay; performance targets;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-03 (All new papers)
- NEP-CBE-2012-04-03 (Cognitive & Behavioural Economics)
- NEP-CTA-2012-04-03 (Contract Theory & Applications)
- NEP-EXP-2012-04-03 (Experimental Economics)
- NEP-HRM-2012-04-03 (Human Capital & Human Resource Management)
- NEP-UPT-2012-04-03 (Utility Models & Prospect Theory)
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