An efficient allocation of risk among employees and owners must:
A) take into account that performance-based incentives are the sole important component of an employee's salary.
B) take into account that attitudes toward risk differ among different people.
C) recognize that inefficiency is inherent to the process.
D) recognize that pooling of risks is never appropriate.

Question

Quizplus · Accepted Answer

Attitudes toward risk vary greatly among individuals, and an efficient allocation of risk must take this diversity into account. It is important to recognize that not all employees and owners have the same tolerance for risk, and the allocation of risk should reflect this. Performance-based incentives are certainly a key component of employee compensation, but they are not the only factor that must be considered when allocating risks. Inefficiencies may arise in the risk allocation process, but they should not be seen as inherent. Finally, pooling of risks can indeed be appropriate in certain circumstances, although it may not be the optimal solution for every situation.

An Efficient Allocation of Risk Among Employees and Owners Must