Agency and Anxiety
"In this paper, we introduce the psychological concept of anxiety into agency theory. An important benchmark in the anxiety literature is the inverted-U hypothesis, which states that an increase in anxiety improves performance when anxiety is low, but reduces it when anxiety is high. We show that the inverted-U hypothesis is consistent with evidence that high-powered incentives can reduce the agent's optimal effort and expected performance. In equilibrium, however, a profit-maximizing principal never offers such counterproductive incentives. We also show that the inverted-U hypothesis can explain empirical anomalies related to monitoring, the informativeness principle, and the risk-reward tradeoff." Copyright (c) 2010, The Author(s) Journal Compilation (c) 2010 Wiley Periodicals, Inc..
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Volume (Year): 19 (2010)
Issue (Month): 1 (03)
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