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The “Sales Agent” Problem: Effort/Leisure Allocation Under Performance Pay As Behavior Towards Risk

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  • C. Bram Cadsby
  • Fei Song
  • Nick Zubanov

Abstract

The choice between safe and risky assets represents behavior towards risk: more risk‐averse investors buy more safe assets. We develop and test a general model that applies this intuition to the time allocation between risky effort and risk‐free leisure under linear incentives. When risk increases with effort, risk‐averse agents choose less effort, but when risk is independent of effort, effort choice is unaffected by risk preferences. In many incentive contracts, income risk is multiplicative with, rather than additive to effort, sales commissions being one example. In such cases, lower effort by the risk‐averse is a hitherto undocumented behavior towards risk (JEL C91, M52, J33)

Suggested Citation

  • C. Bram Cadsby & Fei Song & Nick Zubanov, 2019. "The “Sales Agent” Problem: Effort/Leisure Allocation Under Performance Pay As Behavior Towards Risk," Economic Inquiry, Western Economic Association International, vol. 57(4), pages 1997-2016, October.
    • Handle: RePEc:bla:ecinqu:v:57:y:2019:i:4:p:1997-2016
    DOI: 10.1111/ecin.12821
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    Cited by:

    1. Andelic, Nicole & Allan, Julia & Bender, Keith A. & Powell, Daniel & Theodossiou, Ioannis, 2024. "Does How You Get Paid at Work Affect Your Time off Work? The Relationship between Performance-Related Employment Contracts and Leisure Activities," IZA Discussion Papers 16886, Institute of Labor Economics (IZA).
    2. Butschek, Sebastian & González Amor, Roberto & Kampkötter, Patrick & Sliwka, Dirk, 2022. "Motivating gig workers – evidence from a field experiment," Labour Economics, Elsevier, vol. 75(C).

    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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