6533b7defe1ef96bd1276876
RESEARCH PRODUCT
Incentive systems for risky investment decisions under unknown preferences
Julia OrtnerDavid WollscheidLouis Velthuissubject
Cost allocationCoping (psychology)Actuarial scienceInformation Systems and ManagementComputer scienceAccrual05 social sciencesSpecific knowledgeMicroeconomicsInvestment decisionsIncentiveAccounting0502 economics and businessCash flowPerformance measurement050207 economicsFinance050205 econometricsdescription
Abstract Our paper examines how to design incentive systems for managers making multi-period risky investment decisions. We show how compensation functions and performance measures must be designed to ensure that managers implement the expected value-maximizing set of projects. The Relative Benefit Cost Allocation (RBCA) Scheme 1 and its extensions revealed in literature on unknown time preferences generally fail to do so under unknown time and risk preferences. We illustrate that when coping with such unknown preferences in a risky setting, a specific state-dependent allocation rule is required. We introduce such an allocation scheme, which we refer to as the State-Contingent RBCA Scheme, and reveal that specific knowledge of the time and risk structure of the cash flows is needed to apply it.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2017-09-01 | Management Accounting Research |