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The Tenuous Tradeoff Between Risk and Incentives
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In this article, the authors argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees, and they argue that parts of the existing empirical literature are better explained through this lens than with the standard model.Abstract:
Empirical work testing for a negative tradeoff between risk and incentives, a cornerstone of agency theory, has not had much success. Indeed, the data seem to suggest a positive relationship between measures of uncertainty and incentives, rather than the posited negative tradeoff. I argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees. When workers operate in certain settings, the activities that they should engage in are well known, and firms are content to assign tasks to workers and monitor their inputs. By contrast, when the situation is more uncertain, firms know less about how workers should be spending their time. As a result, the delegate responsibility to workers but, to constraint heir discretion, base compensation on observed output. Hence, uncertainty and output-based pay are positively related. I argue that parts of the existing empirical literature are better explained through this lens than with the standard model.read more
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References
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Journal ArticleDOI
Agency Theory and Franchising: Some Empirical Results
TL;DR: In this article, the authors provide an empirical assessment of various agency-theoretic explanations for franchising, including risk sharing, one-sided moral hazard, and two-sided Moral Hazard.
Journal ArticleDOI
An Analysis of the Use of Accounting and Market Measures of Performance in Executive Compensation Contracts
TL;DR: This article provided useful insights into the structure of compensation plans and their incentive effects, however, one important limitation of these studies is the virtual absence of any cross-sectional analyses of the attributes of compensation contracts.
Journal ArticleDOI
Incentive Contracts and Performance Measurement
TL;DR: In this paper, the authors examine the characteristics of incentive contracts in which the agent's payoff is not based on the principal's objective, and show that contracts based on such performance measures will not in general provide first-best incentives, even when the agent is risk neutral.
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