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Heterogeneity in Organizational Form: Why Otherwise Identical Firms Choose Different Incentives for Their Managers

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  • Benjamin E. Hermalin

Abstract

Product-market competition affects the benefits from providing incentives to managers. In particular, the best response to other firms providing strong incentives can be to provide weak incentives. Conversely, the best response to other firms providing weak incentives can be to provide strong incentives. In equilibrium only a fraction of the firms may, therefore, provide strong incentives. Moreover, all equilibria may exhibit heterogeneity in incentives due to the nonconvexities inherent in the underlying agency problem between firms and their managers. This article also investigates how increased competition affects the strength of the incentives provided in the equilibrium.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 25 (1994)
Issue (Month): 4 (Winter)
Pages: 518-537

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Handle: RePEc:rje:randje:v:25:y:1994:i:winter:p:518-537

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Cited by:
  1. Walter A Cont, 2001. "Essays on Contract Design: Delegation and Agency Problems, and Monitoring Under Collusion," Levine's Working Paper Archive 625018000000000122, David K. Levine.
  2. Cronqvist, Henrik & Low, Angie & Nilsson, Mattias, 2007. "Does Corporate Culture Matter for Firm Policies?," Working Paper Series 2007-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  3. Graziano, Clara & Parigi, Bruno M., 1998. "Do managers work harder in competitive industries?," Journal of Economic Behavior & Organization, Elsevier, vol. 34(3), pages 489-498, March.
  4. Yijiang Wang, . "Demand, Supply and Coordination: An Integrated Theory of the Division of Labor," Working Papers 0405, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus).
  5. Cronqvist, Henrik & Low, Angie & Nilsson, Mattias, 2007. "Does Corporate Culture Matter for Firm Policies?," SIFR Research Report Series 48, Institute for Financial Research.
  6. Wallace HUFFMAN & Richard E. JUST, 1995. "Transaction Costs, Fads, And Politically Motivated Misdirection In Agricultural Research," Staff Papers 277, Iowa State University Department of Economics.
  7. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.
  8. AMIR, Rabah & GARCIA, Filomena & KNAUFF, Malgorzata, 2006. "Endogenous heterogeneity in strategic models: symmetry-breaking via strategic substitutes and nonconcavities," CORE Discussion Papers 2006008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. Adams, Renee & Hermalin, Benjamin E. & Weisbach, Michael S., 2009. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Working Paper Series 2008-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  10. Siemens, Ferdinand von, 2005. "Fairness, Adverse Selection, and Employment Contracts," Discussion Papers in Economics 669, University of Munich, Department of Economics.
  11. Amihai Glazer & Vesa Kanniainen & Panu Poutvaara, 2004. "Initial Luck, Status-Seeking and Snowballs Lead to Corporate Success and Failure," CESifo Working Paper Series 1216, CESifo Group Munich.

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