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Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence

Listed author(s):
  • Zubanov, N.V.

The 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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File URL: https://repub.eur.nl/pub/32031/ERS-2012-005-STR.pdf
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Paper 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 ERIM Report Series Research in Management with number ERS-2012-005-STR.

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Date of creation: 20 Mar 2012
Handle: RePEc:ems:eureri:32031
Contact details of provider: Postal:
RSM Erasmus University & Erasmus School of Economics, PoBox 1738, 3000 DR Rotterdam

Phone: 31-10-408 1182
Fax: 31-10-408 9020
Web page: http://www.erim.eur.nl/
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  1. C. Bram Cadsby & Fei Song & Francis Tapon, 2009. "The Impact of Risk Aversion and Stress on the Incentive Effect of Performance Pay," Working Papers 0912, University of Guelph, Department of Economics and Finance.
  2. Shannon W. Anderson & Henri C. Dekker & Karen L. Sedatole, 2010. "An Empirical Examination of Goals and Performance-to-Goal Following the Introduction of an Incentive Bonus Plan with Participative Goal Setting," Management Science, INFORMS, vol. 56(1), pages 90-109, January.
  3. Barth, Erling & Bratsberg, Bernt & Haegeland, Torbjørn & Raaum, Oddbjørn, 2006. "Who Pays for Performance?," IZA Discussion Papers 2142, Institute for the Study of Labor (IZA).
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