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Long-Term or Short-Term Managerial Incentive Contracts

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  • Juan Carlos Barcena-Ruiz
  • Maria Paz Espinosa

Abstract

This paper deals with the strategic role of the temporal dimension of contracts in a duopoly market. Is it better for a firm to sign long-term incentive contracts with managers or short-term contracts? For the linear case, with strategic substitutes (complements) in the product market, the incentive variables are also strategic substitutes (complements). It is shown that a long-term contract makes a firm a leader in incentives, while a short-term contract makes it a follower. We find that, under Bertrand competition, in equilibrium one firm signs a long-term contract and the other firm short-term incentive contracts; however, under Cournot competition, the dominant strategy is to sign long-term incentive contracts. Copyright 1996 The Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 5 (1996)
Issue (Month): 3 (09)
Pages: 343-359

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Handle: RePEc:bla:jemstr:v:5:y:1996:i:3:p:343-359

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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Cited by:
  1. Lambertini, Luca, 2000. "Strategic Delegation and the Shape of Market Competition," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(5), pages 550-70, November.
  2. L. Lambertini & M. Trombetta, 1997. "May Delegation Affect Firms' Ability to Collude?," Working Papers 275, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Ramón Faulí-Oller & Antonia Díaz, 1999. "- Competition And Privatization," Working Papers. Serie AD 1999-13, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  4. Barcena-Ruiz, Juan Carlos & Campo, Maria Luz, 2000. "Short-term or long-term labor contracts," Labour Economics, Elsevier, vol. 7(3), pages 249-260, May.
  5. Bárcena Ruiz, Juan Carlos & Casado Izaga, Francisco Javier, 1999. "Should Owners of Firms Delegate Long-run Decisions?," BILTOKI 1999-11, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
  6. Iván Barreda-Tarrazona & Nikolaos Georgantzís & Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2012. "Managerial compensation contracts in quantity-setting duopoly," Working Papers 2012/17, Economics Department, Universitat Jaume I, Castellón (Spain).
  7. Carlos Barcena-Ruiz, Juan & Paz Espinosa, Maria, 1999. "Should multiproduct firms provide divisional or corporate incentives?," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 751-764, July.
  8. Juan Carlos Bárcena-Ruiz & F. Javier Casado-Izaga, 2005. "Spatial competition and the duration of managerial incentive contracts," Investigaciones Economicas, Fundación SEPI, vol. 29(2), pages 331-349, May.
  9. L. Lambertini & G. Primavera, 2000. "Delegation vs Cost-Reducing R&D in a Cournot Duopoly," Working Papers 377, Dipartimento Scienze Economiche, Universita' di Bologna.
  10. Barcena-Ruiz, Juan Carlos & Casado-Izaga, F. Javier, 2005. "Should shareholders delegate location decisions?," Research in Economics, Elsevier, vol. 59(3), pages 209-222, September.
  11. Luca Lambertini, 2000. "Extended Games Played by Managerial Firms," The Japanese Economic Review, Japanese Economic Association, vol. 51(2), pages 274-283, 06.

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