Seminar «Risk and Incentives: Agent’s contract choice in risky environments»

IZA-HSE University International Labor Seminar was held on June 23, 2020.

Speaker: Thomas Dohmen (University of Bonn and IZA).

Title: Risk and Incentives: Agent’s contract choice in risky environments.

We conduct laboratory experiments to investigate basic predictions of principal-agent theory about the relationship between piece rates, agents’ risk aversion and riskiness of the environment. Subjects in our experiments choose their preferred payment scheme for a real-effort task from a menu of linear piece rates schemes. As standard theory predicts, more risk averse individuals choose lower piece rates. In contrast to theoretical predictions, we do not find however, that all risk averse workers choose lower piece rates when the riskiness of the environment increases. In fact, the least productive individuals choose higher piece rates in risky environments, while the most productive individuals choose lower piece rates. We hypothesize that reference points affect piece rate choice in risky environments, such that individuals whose expected earnings would exceed (fall below) the reference point in a risk-free environment behave risk averse (seeking) in risky environments. In a second experiment, we exogenously manipulate reference points and confirm this hypothesis.

Seminar was online via Zoom