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

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  • Zubanov, N.V.

Abstract

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.

Suggested Citation

  • Zubanov, N.V., 2012. "Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence," ERIM Report Series Research in Management ERS-2012-005-STR, 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.
  • Handle: RePEc:ems:eureri:32031
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    File URL: https://repub.eur.nl/pub/32031/ERS-2012-005-STR.pdf
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    References listed on IDEAS

    as
    1. C. Bram Cadsby & Fei Song & Francis Tapon, 2016. "The Impact of Risk-Aversion and Stress on the Incentive Effect of Performance-Pay," Research in Experimental Economics,in: Experiments in Organizational Economics, volume 19, pages 189-227 Emerald Publishing Ltd.
    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. Erling Barth & Bernt Bratsberg & Torbjørn Hægeland & Oddbjørn Raaum, 2008. "Who pays for performance?," International Journal of Manpower, Emerald Group Publishing, vol. 29(1), pages 8-29, March.
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    Cited by:

    1. C. Bram Cadsby & Jim Engle-Warnick & Tony Fang & Fei Song, 2014. "Psychological Incentives, Financial Incentives, and Risk Attitudes in Tournaments: An Artefactual Field Experiment," Working Papers 1403, University of Guelph, Department of Economics and Finance.
    2. Zubanov, Nick & Cadsby, Bram & Song, Fei, 2017. "The "Sales Agent" Problem: Effort Choice under Performance Pay as Behavior toward Risk," IZA Discussion Papers 10542, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    incentive pay; performance targets; risk aversion;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • 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

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