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The "Sales Agent" Problem: Effort Choice under Performance Pay as Behavior toward Risk

Listed author(s):
  • Zubanov, Nick

    ()

    (University of Konstanz)

  • Cadsby, Bram

    ()

    (University of Guelph)

  • Song, Fei

    ()

    (Ryerson University)

An investor's choice between safe and risky assets has long been seen as a behavior toward risk: more risk-averse investors buy more of the safe asset. Applying this intuition to incentive pay contracts, we develop a model and an experiment that show, in a very general setting, that the choice between work effort and leisure under given linear incentives depends on how the attendant financial risk interacts with effort. We find that if the risk multiplies with effort, risk-averse individuals work less, whereas under additive risk effort choice is little affected by risk preferences. Our findings complement the literature on worker selection into incentive pay contracts by showing that lower effort of the risk-averse is another type of behavior toward risk. Our study is relevant to practice as well, since many jobs, such as commission work, feature multiplicative rather additive risk.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 10542.

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Length: 35 pages
Date of creation: Feb 2017
Handle: RePEc:iza:izadps:dp10542
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