Abstract: In this paper, the game between enterprise group’s headquarters and subsidiaries that affects the setting of performance target is analyzed. Subsidiaries often use their information superiority to intentionally decrease performance target. This manipulation, which reduces the effectiveness of incentives, will mislead headquarters’ decision-making and affect efficiency of resource allocation. A principal-agent model of subsidiaries’ deflated manipulation is designed based on adaptive expectations hypothesis and subsidiaries’ two-period income. Then, the trigger conditions of subsidiaries’ manipulation and feasible control method of headquarters are explored, and accordingly the corresponding incentive mechanism recommendations of headquarters are put forward.

Key words: deflated manipulation, performance target, principal-agent model, incentive mechanism