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dc.contributor.authorDeVaro, Jed
dc.contributor.authorKurtulus, Fidan Ana
dc.description.abstract[Excerpt] The notion of a negative relationship between risk and incentives is a central prediction of agency theory. A vast literature has failed to find consistent empirical support for this prediction, with some studies finding a positive relationship, some a negative relationship, and some no relationship at all. Prendergast’s (2002) theory extends the principal-agent model to incorporate the delegation of worker authority, showing that a positive relationship between risk and incentives can arise and potentially explaining the mixed results from empirical tests. In this paper, we empirically test Prendergast’s theory. Using a large, nationally-representative cross section of British establishments that includes information both from employers and from multiple workers in each establishment, we address four empirical questions: 1) Is there evidence of a risk-incentives tradeoff as predicted by the principal-agent model? 2) Is there evidence of a positive relationship between incentive pay and the delegation of worker authority as assumed by Prendergast? 3) Is there evidence of a positive relationship between risk and authority as Prendergast also assumes? 4) Is there empirical support for the main testable implication of Prendergast’s model, namely that the evidence favoring a risk-incentives tradeoff should strengthen when authority controls are added to the model? Our answers are affirmative for all four questions.
dc.subjectAgency Theory
dc.subjectRisk versus Incentives Tradeoff
dc.subjectDelegation of Worker Authority
dc.subjectPerformance Pay
dc.titleAn Empirical Analysis of Risk, Incentives, and the Delegation of Worker Authority
dc.description.legacydownloadsDeVaro1_An_Empirical_Analysis_of_Risk__Incentives__and_the_Delegation.pdf: 890 downloads, before Oct. 1, 2020.
local.authorAffiliationDeVaro, Jed: Cornell University
local.authorAffiliationKurtulus, Fidan Ana: Cornell University

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