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Strategic delegation in experimental duopolies with endogenous incentive contracts

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Author Info
Nikolaos Georgantzís () (LEE-LINEEX, Universitat Jaume I)
Constantine Manasakis () (Department of Economics, University of Crete, Greece)
Evangelos Mitrokostas () (Department of Economics, University of Crete)
Emmanuel Petrakis () (Department of Economics, University of Crete, Greece)

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Abstract

Often, deviations of firm behavior from profit maximization are the result of managerial incentive contracts. We study the endogenous emergence of incentive contracts used by firm owners to delegate the strategic decisions of the firm. These contracts are linear combinations either of own firm's profits and revenues, or own and rival firms' profits. A two- and three-stage game are studied depending on whether owners commit or not to a certain contract type before setting the managerial incentives and the level of output to produce in the market. We report experimental results which confirm some of the predictions of the model, especially those concerning owners' preference for relative performance incentives over profit-revenue contracts. Neglected behavioral aspects are proposed as possible explanation of some divergence between the theory and the experimental evidence, more specifically the relation between contract terms and managers' output choices

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Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0809.

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Date of creation: 05 Jun 2008
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Handle: RePEc:crt:wpaper:0809

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Related research
Keywords: Experimental economics; Oligopoly theory; Managerial delegation; Endogenous contracts.;

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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