Risk preferences and contract choices

We conducted a series of field experiments to investigate the ability of experimentally measured risk preferences to predict the contractual choices of workers in the real labour market. In a first set of experiments we twice measured workers' risk preferences using the lottery approach of Holt and Laury (Am Econ Rev 92(5):1644-165, 2002). These workers subsequently participated in a contract-choice experiment, making 12 decisions. For each decision, the worker chose between his/her regular piece-rate contract and a particular fixed wage contract, each distinguished by the level of the fixed wage. One of the twelve decisions was then chosen at random and the worker was paid according to his/her choice for that decision over a period of two working days. We estimate the effect of risk preferences on contractual choices, controlling for measurement error and worker ability. Risk preferences effectively predict contract choices-risk-averse workers are more likely to select fixed-wage contracts. High-ability workers prefer piece-rates.