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

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Author Info

  • Hermalin, Benjamin E.

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

Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt4v4548gz.

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Date of creation: 01 May 1992
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Handle: RePEc:cdl:econwp:qt4v4548gz

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Related research

Keywords: Principal-agent theory; industrial organization; Business; Social and Behavioral Sciences;

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Cited by:
  1. 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.
  2. 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.
  3. Cronqvist, Henrik & Low, Angie & Nilsson, Mattias, 2007. "Does Corporate Culture Matter for Firm Policies?," SIFR Research Report Series 48, Institute for Financial Research.
  4. Siemens, Ferdinand von, 2005. "Fairness, Adverse Selection, and Employment Contracts," Discussion Papers in Economics 669, University of Munich, Department of Economics.
  5. Rabah Amir & Filomena Garcia & Malgorzata Knauff, 2006. "Endogenous Heterogeneity in Strategic Models: Symmetry-breaking via Strategic Substitutes and Nonconcavities," Working Papers Department of Economics 2006/29, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  6. 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.
  7. 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.
  8. 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.
  9. 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).
  10. 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.
  11. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.

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