AN EMPIRICAL ANALYSIS OF RISK, INCENTIVES AND THE DELEGATION OF WORKER AUTHORITY

The authors empirically test Prendergast's (2002) theory that incorporates the delegation of worker authority into the principal-agent model to explain the lack of consistent empirical support for a tradeoff between risk and incentives. Using data from the 1998 British WERS, the authors investi...

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Published inIndustrial & labor relations review Vol. 63; no. 4; pp. 641 - 661
Main Authors DEVARO, JED, KURTULUS, FIDAN ANA
Format Journal Article
LanguageEnglish
Published Los Angeles, CA School of Industrial and Labor Relations, Cornell University 01.07.2010
SAGE Publications
ILR Review, Cornell University, ILR School
SAGE PUBLICATIONS, INC
SeriesIndustrial and Labor Relations Review
Subjects
Authority
Authority control
Decisions
Delegation
Delegation of authority
Earnings
Empirical evidence
Employees
Incentive pay
Incentives
Labor relations
Labor unionization
Labour economics
Modeling
Modelling
Principal-agent models
Principal-agent theory
Private sector
Rights
Risk
Risk aversion
Trade-off
United Kingdom
Work incentives
Workers
Workplaces
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Summary:The authors empirically test Prendergast's (2002) theory that incorporates the delegation of worker authority into the principal-agent model to explain the lack of consistent empirical support for a tradeoff between risk and incentives. Using data from the 1998 British WERS, the authors investigate whether there is: 1) evidence of a risk-incentives tradeoff as predicted by the principal-agent model; 2) evidence of a positive relationship between incentive pay and the delegation of worker authority; 3) evidence of a positive relationship between risk and authority; 4) 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 empirical model. The answers are affirmative for all four questions, thereby providing evidence clarifying the relationship between risk and incentive pay and how managers optimally bundle incentive pay and the delegation of worker decision rights to cope with risk.
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ISSN:0019-7939
2162-271X
DOI:10.1177/001979391006300405