Beruflich Dokumente
Kultur Dokumente
and Management
Chapter 7: Risk Sharing and
Incentive Contracts
Joe Mahoney
University of Illinois at Urbana-Champaign
However, results are frequently affected by things that are outside the
employees control that have nothing to do with how intelligently, honestly,
and diligently the employee has worked. When rewards are based on results,
uncontrollable randomness in outcomes induces randomness in
the
employees income.
A third source of randomness comes from the possibility that outside events
beyond the control of the employee may affect the ability to perform as
contracted. Health problems may reduce the employees strength
and ability to work, concerns about family finances may make it
impossible to concentrate effectively and so forth. Consequently,
making employees responsible for performance subjects them to risk.
The precision with which the desired activities are assessed; and
The less risk averse the agent, the lower the cost he or she
incurs from bearing the risks that attend intense incentives.
According to the incentive intensity principle, more risk
averse agents ought to be provided with less intense
incentives.
#3: The precision with which the desired activities are assessed