30 Pages Posted: 27 Mar 2012
Date Written: March 20, 2012
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: 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