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Performance Pay and Risk Aversion

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  • Grund, Christian
  • Sliwka, Dirk

Abstract

A main prediction of agency theory is the well known risk-incentive trade-off. Incentive contracts should be found in environments with little uncertainty and for agents with low degrees of risk aversion. There is an ongoing debate in the literature about the first trade-off. Due to lack of data, there has so far been hardly any empirical evidence about the second. Making use of a unique representative data set, we find clear evidence that risk aversion has a highly significant and substantial negative impact on the probability that an employee's pay is performance contingent.

Suggested Citation

  • Grund, Christian & Sliwka, Dirk, 2006. "Performance Pay and Risk Aversion," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 101, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:101
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    References listed on IDEAS

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    12. Serfes, Konstantinos, 2005. "Risk sharing vs. incentives: Contract design under two-sided heterogeneity," Economics Letters, Elsevier, vol. 88(3), pages 343-349, September.
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    Cited by:

    1. Bertrand, Marianne, 2011. "New Perspectives on Gender," Handbook of Labor Economics, Elsevier.
    2. Armin Falk & Thomas Dohmen & Uwe Sunde, 2009. "Kontrolliert und repräsentativ: Beispiele zur Komplementarität von Labor- und Felddaten," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 10(s1), pages 54-74, May.
    3. K. Sommerfeld, 2013. "Higher and higher? Performance pay and wage inequality in Germany," Applied Economics, Taylor & Francis Journals, vol. 45(30), pages 4236-4247, October.
    4. Pfeifer, Christian, 2008. "A Note on Risk Aversion and Labour Market Outcomes: Further Evidence from German Survey Data," IZA Discussion Papers 3523, Institute for the Study of Labor (IZA).
    5. Cornelissen, Thomas & Heywood, John S. & Jirjahn, Uwe, 2011. "Performance pay, risk attitudes and job satisfaction," Labour Economics, Elsevier, vol. 18(2), pages 229-239, April.
    6. Sabrina Teyssier, 2012. "Inequity and risk aversion in sequential public good games," Public Choice, Springer, vol. 151(1), pages 91-119, April.
    7. Dur, Robert & Non, Arjan & Roelfsema, Hein, 2010. "Reciprocity and incentive pay in the workplace," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 676-686, August.
    8. Sabrina Teyssier, 2008. "Experimental Evidence on Inequity Aversion and Self-Selection between Incentive Contracts," Post-Print halshs-00303727, HAL.
    9. Thomas Cornelissen & John S. Heywood & Uwe Jirjahn, 2010. "Profit Sharing and Reciprocity: Theory and Survey Evidence," SOEPpapers on Multidisciplinary Panel Data Research 292, DIW Berlin, The German Socio-Economic Panel (SOEP).
    10. Sabrina Teyssier, 2008. "Les Modes de Rémunération comme MécanismesSélectifs de la Main d'oeuvre : Fondements Théoriques et Estimations Empiriques," Post-Print halshs-00303703, HAL.

    More about this item

    Keywords

    Agency theory; GSOEP; Incentives; Pay for performance; Performance appraisal; Risk; Risk aversion;

    JEL classification:

    • 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
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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