The Japanese Accounting Review
Online ISSN : 2185-4793
Print ISSN : 2185-4785
ISSN-L : 2185-4785
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Effects of Ambiguous Common Uncertainty on Employees’ Preference for Relative Performance Contracts
Ge BaiRanjani Krishnan
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2016 Volume 6 Issue 2016 Pages 65-93

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Abstract

We distinguish ambiguous common uncertainty (with unknown probability distribution) from risky common uncertainty (with known probability distribution) and examine how employee preference for relative performance contracts differs between the two conditions. Using economics and psychology theory in decision making under uncertainty, we hypothesize that (i) preference for relative performance contracts is low (high) when common uncertainty is ambiguous (risky); and (ii) confidence mediates the relation between ambiguity and preference for relative performance contracts. Results from a controlled laboratory experiment support these predictions. A follow-up experiment provides evidence that the direct effect of ambiguity and the mediating effect of confidence disappear if the contract is based on independent performance measures. Our study contributes to the literature on performance measurement, employee contract preference, and decision making under uncertainty.

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© 2016 Research Institute for Economics & Business Administration - Kobe University
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