Harris, M. and A. Raviv, "Some Results on Incentive Contracts with Applications to Education and Employment, Health Insurance and Law Enforcement", American Economic Review, March 1978.
This article derives the optimal structure of incentive contracts when workers are risk averse under two conditions: contracts can be state-contingent, or contracts cannot be statee-contingent.
Higgs, Robert, (1973). “Race, Tenure, and Resource Allocation in Southern Agriculture, 1910,” Journal of Economic History, Vol. 33, No. 1 (March), pp. 149-169.
Investigates the organization of agricultural enterprise in 1910 and answers the following questions: (1) what determined the distribution of farm rental contracts between share-rent and fixed-rent forms, and did the tenant's race influence the form of rental contract he obtained? (2) what effect did the race of the farmers and the form of their land tenure have on the determination of farm size?
Prendergast, C. (2000). What trade-off of risk and incentives? American Economic Review, 90(2), 421-425.
In the standard principal-agent model, it is optimal to reduce the strength of incentives when the production environment becomes riskier. But often in reality, riskier jobs are more incentivized than others. Prendergast provides reasons for why this might happen. He also argues that monitoring is more difficult in uncertain environments, and that employers might respond to this greater difficulty by increasing the strength of incentives.
Corgnet, Brice and Roberto Hernán-González. 2017 “Revisiting the Tradeoff between Risk and Incentives: The Shocking Effect of Random Shocks”, Management Science.
Explores the tradeoff between risk and incentives in a controlled laboratory environment. Consistent with the standard model, the article finds that principals increase fixed pay while lowering performance pay when the relationship between effort and output is noisier. Unexpectedly, however, agents produce substantially more in the noisy environment than in the baseline despite lesser pay for performance. This result can be accounted for by introducing agents’ loss aversion in the principal-agent model.
Zubanov Nick., Song Fei, and Bram Cadsby, (2017). “The 'Sales Agent' Problem: Effort Choice under Performance Pay as Behavior toward Risk.” IZA Discussion Papers No. 10542.
Develops a model and an experiment that show, in a very general setting, that the choice between work effort and leisure under given linear incentives depends on how the attendant financial risk interacts with effort. If the risk multiplies with effort, risk-averse individuals work less, whereas under additive risk effort choice is little affected by risk preferences.
Burchardi, Konrad B., Selim Gulesci, Benedetta Lerva, and Munshi Sulaiman, (2019). “Moral Hazard: Experimental Evidence from Tenancy Contracts.” Quarterly Journal of Economics, Volume 134, Issue 1, February 2019, Pages 281–347.
Reports results from a field experiment designed to estimate and understand the effects of sharecropping contracts on agricultural input choices, risk-taking, and output. Finds that tenants with higher output shares utilized more inputs, cultivated riskier crops, and produced 60% more output relative to control.
Dohmen, Thomas, Arjan Non and Tom Stolp 2021 Reference Points and the Tradeoff between Risk and Incentives IZA discussion paper no. 14835
Consistent with the standard model of risk-incentives tradeoffs, the authors show that more risk-averse agents choose contracts with lower piece rates (and higher fixed pay) than other agents in a laboratory experiment. Contrary to those predictions, however, they also find that low-productivity risk averse workers choose higher piece rates when the riskiness of the environment increases. Using a second experiment, the authors show that this is explained by reference points: low-productivity subjects tend to have reference points that are high relative to their expected earnings, inducing them to behave in a risk-seeking way.
Tice, Frances M. 2023 The Role of Common Risk in the Effectiveness of Explicit Relative
Performance Evaluation Management Science, forthcoming.
The author examines the effect of executives’ relative performance evaluation (RPE) on their firms’ performance and their risk-taking behavior. Consistent with their model’s predictions, RPE firms perform better than similar non-RPE firms when there is high common risk exposure and when the common risk removed by the CEO’s performance peers is high. In these circumstances, RPE also reduces the likelihood that CEO will under-invest. Thus, RPE is associated with better risk sharing and stronger incentive alignment when (1) RPE firms are exposed to high common risk and (2) the pool of RPE peer firms s is selected so as to remove common risk.