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Monetary incentives in the loss domain and behavior toward risk: An experimental comparison of three reward schemes including real losses

  • Nathalie Etchart-Vincent

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, ENS Cachan - École Normale Supérieure de Cachan - École normale supérieure (ENS) - Cachan)

  • Olivier L'Haridon

    ()

    (Greg-HEC Paris and University Paris Sorbonne - Greg-HEC Paris and University Paris Sorbonne)

In the loss domain, both practical and ethical considerations rule out the systematic use of an incentive-compatible procedure involving real losses. The experimental study presented here aims at investigating whether some easier-to-implement procedure could be adequately used. For that purpose, the subjects' degree of risk aversion is compared across three payment conditions: a real-losses condition based on a random-lottery (incentive-compatible) system, which serves as a benchmark, and two challengers, namely a "losses-from-an-initial-endowment" procedure and a hypothetical-losses condition. As a by-product, our experimental design also allows us to investigate the impact of monetary incentives in the gain domain. The main result is twofold: no significant difference arises between the three payment conditions in the loss domain, while real and hypothetical choices significantly differ in the gain domain. Our results suggest that the use of monetary incentives may be more crucial in the gain domain than in the loss domain.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00742027.

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Date of creation: 01 Feb 2011
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Publication status: Published, Journal of Risk and Uncertainty, 2011, 42, 1, 61-83
Handle: RePEc:hal:cesptp:hal-00742027
Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00742027
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