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Spatial competition and the duration of managerial incentive contracts

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  • Juan Carlos Bárcena-Ruiz

    (Universidad del País Vasco)

  • F. Javier Casado-Izaga

    (Universidad del País Vasco)

Abstract

We consider a duopoly model of spatial competition in which the owners of the firms can strategically use two variables: the duration of managerial incentive contracts and the location of the firms. In equilibrium, one owner chooses a long-term incentive contract for his manager (becoming a leader in incentives), while the other (the follower) chooses short-term contracts. Both firms are located outside the city boundaries, but the leader locates its firm closer to the market than the follower and encourages its manager to be less aggressive than the follower’s manager. As a result, in contrast to the conventional wisdom, under Bertrand competition the leader obtains higher profits than the follower. (Copyright: Fundación SEPI)

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Bibliographic Info

Article provided by Fundación SEPI in its journal Investigaciones Económicas.

Volume (Year): 29 (2005)
Issue (Month): 2 (May)
Pages: 331-349

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Handle: RePEc:iec:inveco:v:29:y:2005:i:2:p:331-349

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Related research

Keywords: Managerial incentives; product di erentiation; strategic delegation.;

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References

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  1. Gal-Or, Esther, 1985. "First Mover and Second Mover Advantages," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 649-53, October.
  2. Basu, Kaushik, 1995. "Stackelberg equilibrium in oligopoly: An explanation based on managerial incentives," Economics Letters, Elsevier, vol. 49(4), pages 459-464, October.
  3. Holmstrom, Bengt R. & Tirole, Jean, 1989. "The theory of the firm," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 2, pages 61-133 Elsevier.
  4. Lambertini, Luca, 1997. "Unicity of the equilibrium in the unconstrained Hotelling model," Regional Science and Urban Economics, Elsevier, vol. 27(6), pages 785-798, November.
  5. Michael L. Katz, 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 307-328, Autumn.
  6. Sen, Anindya, 1993. "Entry and managerial incentives," International Journal of Industrial Organization, Elsevier, vol. 11(1), pages 123-137, March.
  7. Hamilton, Jonathan H. & Slutsky, Steven M., 1990. "Endogenous timing in duopoly games: Stackelberg or cournot equilibria," Games and Economic Behavior, Elsevier, vol. 2(1), pages 29-46, March.
  8. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Juan Carlos Barcena-Ruiz & Maria Paz Espinosa, 1996. "Long-Term or Short-Term Managerial Incentive Contracts," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 343-359, 09.
  10. David Scharfstein, 1988. "Product-Market Competition and Managerial Slack," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 147-155, Spring.
  11. Barcena-Ruiz, Juan Carlos & Espinosa, Maria Paz, 2000. "Entry and Managerial Incentives: A Note," Bulletin of Economic Research, Wiley Blackwell, vol. 52(2), pages 175-80, April.
  12. Tabuchi, Takatoshi & Thisse, Jacques-Francois, 1995. "Asymmetric equilibria in spatial competition," International Journal of Industrial Organization, Elsevier, vol. 13(2), pages 213-227.
  13. 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).
  14. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  15. Steve Dowrick, 1986. "von Stackelberg and Cournot Duopoly: Choosing Roles," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 251-260, Summer.
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