Sorting, Incentives and Risk Preferences: Evidence from a Field Experiment

24 Pages Posted: 1 Aug 2006

See all articles by Bruce Shearer

Bruce Shearer

Université Laval - Département d'Économique; IZA Institute of Labor Economics

Charles Bellemare

Université Laval - Département d'Économique; Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE); IZA Institute of Labor Economics

Date Written: July 2006

Abstract

The, often observed, positive correlation between incentive intensity and risk has been explained in two ways: the presence of transaction costs as determinants of contracts and the sorting of risk-tolerant individuals into firms using high-intensity incentive contracts. The empirical importance of sorting is perhaps best evaluated by directly measuring the risk tolerance of workers who have selected into incentive contracts under risky environments. We use experiments, conducted within a real firm, to measure the risk preferences of a sample of workers who are paid incentive contracts and face substantial daily income risk. Our experimental results indicate the presence of sorting; workers in our sample are risk-tolerant. Moreover, their level of tolerance is considerably higher than levels observed for samples of individuals representing broader populations. Interestingly, the high level of risk tolerance suggests that both sorting and transaction costs are important determinants of contract choices when workers have heterogeneous preferences.

Keywords: risk aversion, sorting, incentive contracts, field experiments

JEL Classification: J33, M52, C93

Suggested Citation

Shearer, Bruce and Bellemare, Charles, Sorting, Incentives and Risk Preferences: Evidence from a Field Experiment (July 2006). IZA Discussion Paper No. 2227, Available at SSRN: https://ssrn.com/abstract=921401

Bruce Shearer (Contact Author)

Université Laval - Département d'Économique ( email )

2325 Rue de l'Université
Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada
418-656-2131 (Phone)
418-656-7798 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Charles Bellemare

Université Laval - Département d'Économique ( email )

2325 Rue de l'Université
Ste-Foy, Quebec G1K 7P4 G1K 7P4
Canada

Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi (CIRPÉE)

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

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