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 subordinate's risk preference criterion to determine the implied risk preference criterion which is 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 result which would be of help to management in designing a goal-based incentive scheme are obtained. Results are related to earlier empirical observations.