Accession Number:

AD0604851

Title:

RISK-AVERSION IN INCENTIVE CONTRACTING: AN EXPERIMENT

Descriptive Note:

Corporate Author:

RAND CORP SANTA MONICA CA

Report Date:

1964-08-01

Pagination or Media Count:

26.0

Abstract:

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.

Subject Categories:

  • Administration and Management
  • Economics and Cost Analysis

Distribution Statement:

APPROVED FOR PUBLIC RELEASE