Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence
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.
|incentive pay, performance targets, risk aversion|
|Laboratory, Individual Behavior (jel C91), Compensation Packages; Payment Methods (jel J33), Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues) (jel M52)|
|Erasmus Research Institute of Management|
|ERIM Report Series Research in Management|
|Organisation||Erasmus Research Institute of Management|
Zubanov, N.V. (2012). Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence (No. ERS-2012-005-STR). ERIM Report Series Research in Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/32031