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Risk management versus incentives

Author

Listed:
  • Eyvind Aven
  • Kjell Lovas
  • Petter Osmundsen

Abstract

Portfolio theory indicates that risk management should take place at the group level. Hedging at the project level or in the individual business areas may lead to suboptimal results. However, the efficiency of a profit centre depends on its management's being able to influence factors that are crucial to the unit's financial results. Price hedging could be one such factor. In the wider perspective, this constitutes part of the balancing between centralisation and decentralisation. This article covers important elements of risk management and incentive design. It goes on to discuss the balancing of overall risk management at the group level and incentive design in profit centres and corporate units. Throughout the article, the oil industry serves as a case.

Suggested Citation

  • Eyvind Aven & Kjell Lovas & Petter Osmundsen, 2006. "Risk management versus incentives," International Journal of Global Energy Issues, Inderscience Enterprises Ltd, vol. 26(1/2), pages 158-169.
    • Handle: RePEc:ids:ijgeni:v:26:y:2006:i:1/2:p:158-169
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    Cited by:

    1. Aune, Finn Roar & Mohn, Klaus & Osmundsen, Petter & Rosendahl, Knut Einar, 2010. "Financial market pressure, tacit collusion and oil price formation," Energy Economics, Elsevier, vol. 32(2), pages 389-398, March.

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