The effect of ambiguity aversion on reward scheme choice
AbstractWe test the implications of ambiguity aversion in a principal-agent problem with multiple agents. Models of ambiguity aversion suggest that, under ambiguity, comparative compensation schemes may become more attractive than independent wage contracts. We test this by presenting agents with a choice between comparative reward schemes and independent contracts, which are designed such that under uncertainty about output distributions (that is, under ambiguity), ambiguity averse agents (and only those) should typically prefer comparative reward schemes, independent of their degree of risk aversion. We indeed find that the share of agents who choose the comparative scheme is higher under ambiguity than in the case of known output distributions. --
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Bibliographic InfoPaper provided by Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) in its series DICE Discussion Papers with number 55.
Date of creation: 2012
Date of revision:
ambiguity aversion; comparative compensation schemes; Ellsberg urn; contract design;
Find related papers by JEL classification:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- M55 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Labor Contracting Devices
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
- NEP-BEC-2012-06-25 (Business Economics)
- NEP-EXP-2012-06-25 (Experimental Economics)
- NEP-HRM-2012-06-25 (Human Capital & Human Resource Management)
- NEP-UPT-2012-06-25 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Stefan T. Trautmann & Ferdinand M. Vieider & Peter P. Wakker, 2011. "Preference Reversals for Ambiguity Aversion," Management Science, INFORMS, vol. 57(7), pages 1320-1333, July.
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