Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/250496 
Year of Publication: 
2021
Series/Report no.: 
IZA Discussion Papers No. 14835
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
We conduct laboratory experiments to investigate basic predictions of principal-agent theory about the choice of piece rate contracts in the presence of output risk, and provide novel insights that reference dependent preferences affect the tradeoff between risk and incentives. Subjects in our experiments choose their compensation for performing a real-effort task from a menu of linear piece rate and fixed payment combinations. As classical principal-agent models predict, more risk averse individuals choose lower piece rates. However, in contrast to those predictions, we find that low-productivity risk averse workers choose higher piece rates when the riskiness of the environment increases. 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.
Subjects: 
incentive
piece-rate
risk
reference point
laboratory experiment
JEL: 
D81
D91
M52
Document Type: 
Working Paper

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