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Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence

30 Pages Posted: 27 Mar 2012  

Nick Zubanov

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: March 20, 2012

Abstract

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: risk aversion, incentive pay, performance targets

JEL Classification: C91, M52, J33

Suggested Citation

Zubanov, Nick, Risk Aversion and Effort in an Incentive Pay Scheme with Multiplicative Noise: Theory and Experimental Evidence (March 20, 2012). ERIM Report Series Reference No. ERS-2012-005-STR. Available at SSRN: https://ssrn.com/abstract=2029434

Nick Zubanov (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

HOME PAGE: http://www.eur.nl/ese/english/about_ese/staff/profiel_mis/10636/

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