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Incentives and Relative Wealth Concerns

Author

Listed:
  • Salvatore Miglietta

    (Department of Financial Economics, BI Norwegian Business School, Nydalsveien 37, 0442 Oslo, Norway)

Abstract

If risk-averse agents prefer to be wealthier both in absolute terms and relative to their peers (relative wealth concerns), then (1) they prefer positive correlation, and (2) they are averse to negative correlation between their payoffs. A laboratory experiment shows that subjects prefer positively correlated payoffs. Subjects interested in relative payoffs display stronger aversion to negatively correlated payoffs. This novel evidence has implications that motivate firms' extensive use of broad-based incentive plans and firms' scarce use of Relative Performance Evaluation (RPE) contracts.

Suggested Citation

  • Salvatore Miglietta, 2014. "Incentives and Relative Wealth Concerns," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 1-34.
    • Handle: RePEc:wsi:qjfxxx:v:04:y:2014:i:04:n:s201013921450013x
    DOI: 10.1142/S201013921450013X
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    Citations

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    Cited by:

    1. Castañeda, Pablo & Devoto, Benjamín, 2016. "On the structural estimation of an optimal portfolio rule," Finance Research Letters, Elsevier, vol. 16(C), pages 290-300.
    2. Qi Liu & Bo Sun, 2016. "Relative Wealth Concerns, Executive Compensation, and Systemic Risk-Taking," International Finance Discussion Papers 1164, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Compensation; relative wealth concerns; other-looking preferences; incentives; J31; G02;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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