Working Paper: NBER ID: w22486
Authors: Philip Brookins; Jennifer Brown; Dmitry Ryvkin
Abstract: Incentive schemes that reward participants based on their relative performance are often thought to be particularly risk-inducing. Using a novel, real-effort task experiment in the laboratory, we find that the relationship between incentives and risk-taking is more nuanced and depends critically on the availability of information about peers’ strategies and outcomes. Indeed, we find that when no peer information is available, relative rewards schemes are associated with significantly less risk-taking than non-competitive rewards. In contrast, when decision-makers receive information about their peers’ actions and/or outcomes, relative incentive schemes are associated with more risk-taking than non-competitive schemes. The nature of the feedback—whether subjects receive information about peers’ strategies, outcomes, or both—also affects risk-taking. We find no evidence that competitors imitate their peers when they face only feedback about other subjects’ risk-taking strategies. However, decision-makers take more risk when they see the gaps between their performance score and their peers’ scores grow. Combined feedback about peers’ strategies and performance—from which subjects may assess the overall relationship between risk-taking and success—is associated with more risk-taking when rewards are based on relative performance; we find no similar effect for non-competitive rewards.
Keywords: incentive schemes; risk-taking; peer information; competitive pay; noncompetitive pay
JEL Codes: C72; C91; C92; D81; G17; M52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Incentive schemes (J33) | Risk-taking behavior (D91) |
| Peer information (C92) | Risk-taking behavior (D91) |
| Relative rewards schemes (no peer information) (J33) | Risk-taking behavior (D91) |
| Relative incentive schemes (with peer information) (D82) | Risk-taking behavior (D91) |
| Combined feedback (strategies and scores) (C70) | Risk-taking behavior (competitive rewards) (D91) |
| Combined feedback (strategies and scores) (C70) | Risk-taking behavior (noncompetitive rewards) (D91) |
| Feedback about strategies only (C90) | Risk-taking behavior (D91) |
| Perception of performance gaps (L25) | Risk-taking behavior (D91) |
| Incentives + Peer information (C92) | Risk-taking behavior (D91) |