PROPER INCENTIVES TO PROMOTE REPORTING TROUBLES

Abstract

If a risk manager only knows troubles that are reported by his subordinates, his actions to reduce the number of reported troubles may suppress reporting troubles, which results in a higher risk of accident. In order to avoid hiding troubles, the risk manager may well put weak penalties on reported troubles, and give relatively small competitive incentives to his subordinates. For a type of accidents that are characterized by low frequency but large losses, the optimal penalties on reported troubles are even weaker. To prevent such accidents, the effectiveness of penalties will be limited, and the relative importance of intrinsic motivations will increase.