An Empirical Analysis Of Risk, Incentives, And The Delegation Of Worker Authority

The notion of a negative relationship between risk and incentives is a central prediction of agency theory. A vast literature has failed to find consistent empirical support for this prediction, with some studies finding a positive relationship, some a negative relationship, and some no relationship at all. Prendergast's (2002) theory extends the principal-agent model to incorporate the delegation of worker authority, showing that a positive relationship between risk and incentives can arise and potentially explaining the mixed results from empirical tests. In this paper, the authors empirically test Prendergast's theory.