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The effect of ambiguity aversion on reward scheme choice

Listed author(s):
  • Kellner, Christian
  • Riener, Gerhard

We 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 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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165176514003152
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 125 (2014)
Issue (Month): 1 ()
Pages: 134-137

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Handle: RePEc:eee:ecolet:v:125:y:2014:i:1:p:134-137
DOI: 10.1016/j.econlet.2014.08.025
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  2. Yoram Halevy, 2007. "Ellsberg Revisited: An Experimental Study," Econometrica, Econometric Society, vol. 75(2), pages 503-536, March.
  3. 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.
  4. Kellner, Christian, 2015. "Tournaments as a response to ambiguity aversion in incentive contracts," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 627-655.
  5. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  6. Dilip Mookherjee, 1984. "Optimal Incentive Schemes with Many Agents," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 433-446.
  7. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
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