Analysis of Implied Risk-Taking Behavior Under a Goal-Based Incentive Scheme

The purpose of this paper is an analysis of how an incentive scheme and the subordinates risk preference interact to determine the implied risk preference criterion which are essentially used in arriving at a decision under uncertainty in a decentralized decision making situation. After emphasizing the importance of risk-congruence in management control under uncertainty, a topic rarely mentioned in the past, some analytical results which would be of help to the management in designing a goal-based incentive scheme are obtained. Results are related to an earlier empirical observation as its possible explanations.