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Competition And The Strategic Choice Of Managerial Incentives: The Relative Performance Case

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  • Alessandra Chirco
  • Marcella Scrimitore
  • Caterina Colombo

Abstract

In this paper we study the role of market competitiveness in a strategic delegation game in which owners delegate output decisions to managers interested in the firm's relative performance. In particular we study how the optimal delegation scheme - i.e. the distortion from pure profit maximization - is affected by market concentration and the elasticity of market demand. We show that these two indexes of market competitiveness do not alter managerial incentives in the same way: while the optimal degree of delegation decreases as the market becomes less concentrated, it increases as demand becomes more elastic.
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  • Alessandra Chirco & Marcella Scrimitore & Caterina Colombo, 2011. "Competition And The Strategic Choice Of Managerial Incentives: The Relative Performance Case," Metroeconomica, Wiley Blackwell, vol. 62(4), pages 533-547, November.
  • Handle: RePEc:bla:metroe:v:62:y:2011:i:4:p:533-547
    DOI: j.1467-999X.2011.04124.x
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    1. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    2. Miller, Nolan H & Pazgal, Amit I, 2001. "The Equivalence of Price and Quantity Competition with Delegation," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 284-301, Summer.
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    7. Nikolaos Georgantzís & Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2008. "Strategic Delegation in Experimental Duopolies with Endogenous Incentive Contracts," Working Papers 0809, University of Crete, Department of Economics.
    8. Palomino, Frederic, 2005. "Relative performance objectives in financial markets," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 351-375, July.
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    11. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-147, Supplemen.
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    Cited by:

    1. Stadler, Manfred & Neus, Werner, 2018. "Cross Holdings and Strategic Manager Compensation. The Case of an Asymmetric Triopoly," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181534, Verein für Socialpolitik / German Economic Association.
    2. Neus, Werner & Stadler, Manfred, 2018. "Common holdings and strategic manager compensation: The case of an asymmetric triopoly," University of Tübingen Working Papers in Business and Economics 109, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    3. Stadler Manfred & Unsorg Maximiliane, 2022. "Manager Delegation, Owner Coordination and Firms’ Investment in Automation," Review of Economics, De Gruyter, vol. 73(2), pages 159-182, August.
    4. Fanti, Luciano & Gori, Luca & Sodini, Mauro, 2015. "Nonlinear dynamics in a Cournot duopoly with isoelastic demand," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 108(C), pages 129-143.
    5. Leonard F. S. Wang, 2020. "Relative Performance Versus Market Share Delegation in a Vertically Related Market," Arthaniti: Journal of Economic Theory and Practice, , vol. 19(1), pages 16-27, June.
    6. Jumpei Hamamura, 2022. "Weight assigned to a rival's profit by an advantaged firm in relative performance evaluation with Cournot–Bertrand competition," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(7), pages 2838-2844, October.
    7. Ya-Chin Wang, 2013. "Optimal R&D Policy and Managerial Delegation Under Vertically Differentiated Duopoly," South African Journal of Economics, Economic Society of South Africa, vol. 81(4), pages 605-624, December.
    8. Jumpei Hamamura, 2021. "What level do disadvantaged firms weight rivals' profits in relative performance evaluations under quantity competition?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(2), pages 493-501, March.
    9. Jumpei Hamamura & Vinay Ramani, 2023. "Social performance versus relative performance evaluation, asymmetric costs, and quantity competition under managerial delegation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1706-1719, April.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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