Reference points and the tradeoff between risk and incentives

We conduct laboratory experiments to investigate basic predictions of principal-agent theory about the choice piece rate contracts in presence output risk, and provide novel insights that reference dependent preferences affect tradeoff between risk incentives. Subjects our choose their compensation scheme for performing a real-effort task from menu linear fixed payment combinations. As classical models predict, more averse individuals lower rates. However, contrast those predictions, we find low-productivity workers higher rates when riskiness environment increases. hypothesize points risky environments, such whose expected earnings would exceed (fall below) point risk-free behave (seeking) environments. In second experiment, exogenously manipulate confirm this hypothesis.