Revisiting the Trade-off Between Risk and Incentives: The Shocking Effect of Random Shocks?

Abstract

and seminar participants at various institutions for helpful comments. We also thank the Economic Science Institute and Chapman University for their generous support. Any remaining errors are ours.

An experimental investigation of the ‘tenuous trade-off’ between risk and incentives in organizations

“…Supporting the model's prediction, we find no relationship between the variance in the performance and the effort choice of the agent. Furthermore, we find a positive relationship between effort and the size of the piece rate offered (ceteris paribus), which is in line with the predictions of the model, and more generally with the assumption of payoff maximizing behavior found in the literature on incentive contracts (Anderhub et al 2002;Corgnet and Hernán-González 2018;Karakostas et al 2017;Sloof and van Praag 2010).…”

“…In this paper, we present a controlled laboratory experiment that tests the relationship between incentive intensity and risk while isolating any alternative explanations. Testing this relationship in the lab has two significant advantages: first, it provides enhanced control, which allows implementing precise values of the parameters of the model (Charness and Kuhn 2010;Camerer and Weber 2013); second, it allows ruling out alternative explanations (such as the ones discussed earlier) of why the relationship observed using field data is weak or non-existent (Charness and Kuhn 2010;Corgnet and Hernán-González 2018).…”

“…To the best of our knowledge, this is only the second experimental study that tests the relationship between incentive intensity and risk. Very recently, Corgnet and Hernán-González (2018), henceforth C-HG, report an experiment that independently tests the trade-off between risk and incentives. Our experimental design shares various similarities and some crucial divergences with that of C-HG.…”

The Economics of Babysitting a Robot

“…These results are attributed to the differences in perceived self-threat and future work concerns associated with each replacement option and perspective. Acemoglu and Restrepo (2018a,b, 2019 develop a task-based framework 8 to analyze the effects of automation on the labor market and use the framework to empirically evaluate these effects in the US context. Acemoglu and Restrepo (2018a,b) use a task-based framework to analyze the effects of new technologies, such as automation, on the labor market.…”

Goal setting in the principal–agent model: Weak incentives for strong performance

“…Our subject pool consisted of students from a major U.S. University. We recruited people who previously participated in related studies (Corgnet and Hernan-Gonzalez, 2015;Corgnet et al 2015c) so as to ensure that they had experience in completing the work task used in this experiment. This was done so that subjects could accurately assess their skills on the task and better understand the consequences of each possible contract.…”