{'fraction_non_alphanumeric': 0.026446280991735537, 'fraction_numerical': 0.0, 'mean_word_length': 5.69060773480663, 'pattern_counts': {'":': 0, '<': 0, '<?xml version=': 0, '>': 0, 'https://': 0, 'lorem ipsum': 0, 'www.': 0, 'xml': 0}, 'pii_count': 0, 'substrings_counts': 0, 'word_list_counts': {'cursed_substrings.json': 0, 'profanity_word_list.json': 0, 'sexual_word_list.json': 0, 'zh_pornsignals.json': 0}}
The Effect of Compensation Caps on Risk-Taking

Using an experiment, we investigate the joint effects of compensation caps and formal justification requirements on risk-taking. Compensation caps restrict the earnings potential of decision-makers and have been implemented to influence risk-taking behavior, especially after the financial crisis. Rational choice theory predicts that caps should restrict only risk-seeking decision-makers from taking undesired risk and not affect risk-averse decision-makers. Based on the compromise effect, however, we predict that compensation caps will also affect risk-averse decision-makers. Moreover, we posit that the effect of compensation caps on risk-averse decision-makers is stronger in the presence of high justification pressure. Our results support both hypotheses and indicate that compensation caps have unintended consequences. In particular, risk-averse decision-makers also take less risk when their compensation is capped, especially in combination with justification requirements, which are another frequently used instrument to steer risk-taking. The result might be dysfunctionally low levels of risk-taking for exploiting entrepreneurial opportunities.