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Performance Pay and Risk Aversion

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  • Grund, Christian

    (RWTH Aachen University)

  • Sliwka, Dirk

    (University of Cologne)

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.

Suggested Citation

  • Grund, Christian & Sliwka, Dirk, 2006. "Performance Pay and Risk Aversion," IZA Discussion Papers 2012, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2012
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    Cited by:

    1. Bertrand, Marianne, 2011. "New Perspectives on Gender," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 17, pages 1543-1590, Elsevier.
    2. Armin Falk & Thomas Dohmen & Uwe Sunde, 2009. "Kontrolliert und repräsentativ: Beispiele zur Komplementarität von Labor‐ und Felddaten," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 10(s1), pages 54-74, May.
    3. K. Sommerfeld, 2013. "Higher and higher? Performance pay and wage inequality in Germany," Applied Economics, Taylor & Francis Journals, vol. 45(30), pages 4236-4247, October.
    4. Pfeifer, Christian, 2008. "A Note on Risk Aversion and Labour Market Outcomes: Further Evidence from German Survey Data," IZA Discussion Papers 3523, Institute of Labor Economics (IZA).
    5. Seeun Jung & Kenneth Houngbedji, 2014. "Shirking, Monitoring, and Risk Aversion," PSE Working Papers halshs-00965532, HAL.
    6. Cornelissen, Thomas & Heywood, John S. & Jirjahn, Uwe, 2011. "Performance pay, risk attitudes and job satisfaction," Labour Economics, Elsevier, vol. 18(2), pages 229-239, April.
    7. Sabrina Teyssier, 2012. "Inequity and risk aversion in sequential public good games," Public Choice, Springer, vol. 151(1), pages 91-119, April.
    8. Dur, Robert & Non, Arjan & Roelfsema, Hein, 2010. "Reciprocity and incentive pay in the workplace," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 676-686, August.
    9. Sabrina Teyssier, 2008. "Experimental Evidence on Inequity Aversion and Self-Selection between Incentive Contracts," Post-Print halshs-00303727, HAL.
    10. Thomas Cornelissen & John S. Heywood & Uwe Jirjahn, 2010. "Profit Sharing and Reciprocity: Theory and Survey Evidence," SOEPpapers on Multidisciplinary Panel Data Research 292, DIW Berlin, The German Socio-Economic Panel (SOEP).
    11. Sabrina Teyssier, 2008. "Les Modes de Rémunération comme MécanismesSélectifs de la Main d'oeuvre : Fondements Théoriques et Estimations Empiriques," Post-Print halshs-00303703, HAL.
    12. SeEun Jung, 2017. "The gender wage gap and sample selection via risk attitudes," International Journal of Manpower, Emerald Group Publishing Limited, vol. 38(2), pages 318-335, May.
    13. Seeun JUNG, 2014. "Risk Attitudes and Shirking on the Quality of Work under Monitoring: Evidence from a Real-Effort Task Experiment," THEMA Working Papers 2014-26, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    14. Colin Green & John S. Heywood, 2008. "Does Performance Pay Increase Job Satisfaction?," Economica, London School of Economics and Political Science, vol. 75(300), pages 710-728, November.

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    More about this item

    Keywords

    performance appraisal; risk aversion; incentives; risk; pay for performance; agency theory; GSOEP;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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