Abstract
Standard economic theory treats contractual risk the same as risk experienced in a lottery, but the transfer of risk from principal to agent may change the perception of risk. Previous experimental studies have shown that positive and negative framing affects both gambles and incentive contracts. An agent’s perception of bonus and penalty framing in a contract can determine the extent to which lottery risk and contractual risk are similar. We designed an experiment that tested the effect of bonus and penalty framed contracts on behavior under an implicit chance of failure. Moreover, we used functional magnetic resonance imaging (fMRI) to observe brain activity while participants viewed the contracts and purchased precautionary measures. We found that the dorsal striatum was more active during a penalty frame than a bonus frame. The study suggests that risk experienced by agents in an incentive contract is not comparable to risk experienced as a lottery.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
