Traditionally, researchers have had difficulty testing the relationship between the degree of risk or uncertainty in workers' environments and incentive pay. The authors employ Prendergast's (2002) theory that incorporates the delegation of worker authority into the principal-agent model to...

This study investigates the structure of optimal incentives in a stochastic environment and provides evidence for the use of self-enforcing relational contracts. We show theoretically that under relational contracting, firms can credibly promise chief executive officers (CEOs) larger bonuses in...