Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence
2012-03-20
Research Paper
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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.
Keywords
Classifications using
Journal of Economic Literature (JEL) Classification System
- M52 : Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues)
- J33 : Compensation Packages; Payment Methods
- C91 : Laboratory, Individual Behavior
Automatically Extracted Terms
- e ffort
- round
- aversion
- risk aversion
- group
- incentive
- participant
- experiment
- treatment
- worker
- noise
- control
- treatment group
- number
- model
- performance
- minute
- control group
- section
- payment
