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Bargaining over managerial contracts in delegation games: managerial power, contract disclosure and cartel behavior

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Author Info

  • Arjen van Witteloostuijn

    (University of Antwerp, Antwerp, Belgium)

  • Thijs Jansen

    (University of Maastricht, Maastricht, The Netherlands)

  • Arie van Lier

    (University of Groningen, Groningen, The Netherlands)

Abstract

Modern corporate governance codes include clauses requiring the disclosure of managerial compensation. Such codes have been installed to protect shareholders' interests. In this paper, we explore the impact of such disclosure on consumer welfare. We consider two-stage delegation games in which owner-shareholders negotiate about compensation with their managers in the game's first stage. At the end of the first stage, the managerial compensation contract outcomes of the bargaining process are publicly announced. In the second stage, Cournot competition evolves. We prove that sales delegation generates equilibria radically different from relative performance delegation. Using classical Cournot as the benchmark, contractual bargaining over sales compensation gives tougher product market competition-and hence higher consumer surplus. The opposite holds true for relative performance delegation. Then, cartel behavior is promoted, reducing consumer surplus. Copyright © 2007 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

Volume (Year): 28 (2007)
Issue (Month): 8 ()
Pages: 897-904

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Handle: RePEc:wly:mgtdec:v:28:y:2007:i:8:p:897-904

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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References

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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 927-40, December.
  2. Szymanski, Stefan, 1994. "Strategic delegation with endogenous costs : A duopoly with wage bargaining," International Journal of Industrial Organization, Elsevier, vol. 12(1), pages 105-116, March.
  3. Fershtman, Chaim, 1985. "Managerial incentives as a strategic variable in duopolistic environment," International Journal of Industrial Organization, Elsevier, vol. 3(2), pages 245-253, June.
  4. Bughin, J., 1995. "Unions and strategic managerial incentives," Economics Letters, Elsevier, vol. 47(1), pages 95-100, January.
  5. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  6. Nolan Miller & Amit Pazgal, 2002. "Relative performance as a strategic commitment mechanism," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(2), pages 51-68.
  7. Inderst, Roman, 2002. "Contract design and bargaining power," Economics Letters, Elsevier, vol. 74(2), pages 171-176, January.
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Cited by:
  1. Luciano Fanti & Nicola Meccheri, 2012. "Managerial Delegation under Alternative Unionization Structures," Working Paper Series 07_12, The Rimini Centre for Economic Analysis.
  2. Yasuhiko Nakamura & Kohei Kamaga, 2008. "Bargaining over Managerial Contracts in Delegation Games: The Sequential Move Case," Economics Bulletin, AccessEcon, vol. 12(7), pages 1-8.
  3. 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).
  4. Fanti, Luciano & Gori, Luca & Sodini, Mauro, 2012. "Nonlinear dynamics in a Cournot duopoly with relative profit delegation," MPRA Paper 37834, University Library of Munich, Germany.
  5. Yasuhiko Nakamura, 2008. "Bargaining over Managerial Contracts in Delegation Games: The Differentiated Goods Case," Economics Bulletin, AccessEcon, vol. 12(6), pages 1-8.
  6. Nicola Meccheri & Luciano Fanti, 2012. "Managerial Delegation Schemes in a Duopoly with Endogenous Production Costs: A Comparison of Sales and Relative Profit Delegation under Centralised Unionisation," Working Paper Series 44_12, The Rimini Centre for Economic Analysis.
  7. Fanti, Luciano & Gori, Luca, 2011. "Stability analysis in a Cournot duopoly with managerial sales delegation and bounded rationality," MPRA Paper 33828, University Library of Munich, Germany.
  8. Nakamura, Yasuhiko, 2011. "Bargaining over managerial delegation contracts and merger incentives in an international oligopoly," Research in Economics, Elsevier, vol. 65(1), pages 47-61, March.
  9. Ciarreta Antuñano, Aitor & García Enríquez, Javier & Gutiérrez Hita, Carlos, 2012. "A note on bargaining power and managerial delegation in multimarket oligopolies," DFAEII Working Papers DFAEII;2012-17, University of the Basque Country - Department of Foundations of Economic Analysis II.
  10. Leonard F. S. Wang & Wei Zhao & Ya -Chin Wang, 2008. "Strategic Trade Policy in Bargaining over Managerial Delegation Competition," Economics Bulletin, AccessEcon, vol. 6(38), pages 1-8.
  11. repec:ebl:ecbull:v:6:y:2008:i:38:p:1-8 is not listed on IDEAS

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