RISK-AVERSION IN INCENTIVE CONTRACTING: AN EXPERIMENT
RAND CORP SANTA MONICA CA
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The experiment described here examines the effect of varying the sharing rate in a very simplified incentive contract bidding situation. Subjects were asked to compete for contracts with the bidders sharing rate varying from .10 to .50. They believed that they were competing against two other subjects and that each contract was awarded to the low bidder. Sixteen undergraduates participated as subjects, and the results showed that both the average bids and expected profit increased monotonically with sharing rate. It is concluded that in this type of experiment, subjects bid so as to increase their expected profits as a function of increasing uncertainty of the outcome. These findings are in general agreement with the literature on risk-taking behavior. These results and the increasing significance of incentive contracts suggest that further study of the relation between bidding behavior and risk is warranted. An experiment with actual procurements is suggested as a means of conducting this investigation.
- Administration and Management
- Economics and Cost Analysis