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Do firms' owners delegate both short-run and long-run decisions to their managers in equilibrium?

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  • Evangelos Mitrokostas

    ()
    (Department of Economics, University of Crete)

  • Emmanuel Petrakis

    ()
    (Department of Economics, University of Crete, Greece)

Abstract

The present paper explores the scope of strategic delegation, to the firms' R&D investments and market competition in a Cournot Oligopoly. The firms' owners' have two alternative strategies: either the Full Delegation (FD) one, in which firms' owners delegate both short-run and long-run decisions to their managers, or the Partial Delegation (PD) one, in which firms' owners delegate only short-run decisions to their managers. We investigate which delegation strategy will emerge in equilibrium, under the assumption that there is no credible commitment between the firms' owners over the strategy they will select. We find that the Universal Partial Delegation is never an equilibrium configuration. If the initial unit cost is relatively high (low), the Universal Full Delegation (Coexistence) configuration is the only endogenously emerging equilibrium. However, the above results are sensitive to the existence of the commitment assumption.

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Bibliographic Info

Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0815.

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Date of creation: 17 Jun 2008
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Handle: RePEc:crt:wpaper:0815

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Related research

Keywords: Strategic Delegation; Oligopoly; R&D Investments; Equilibrium Delegation Schemes.;

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References

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  1. Bester, H. & Petrakis, E., 1991. "The Incentives for Cost Reduction in a Differentiated Industry," Papers 9136, Tilburg - Center for Economic Research.
  2. Michael Kopel & Christian Riegler, 2006. "R&D in a strategic delegation game revisited: a note," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(7), pages 605-612.
  3. 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.
  4. Demsetz, Harold, 1983. "The Structure of Ownership and the Theory of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 375-90, June.
  5. d'Aspremont, Claude & Jacquemin, Alexis, 1990. "Cooperative and Noncooperative R&D in Duopoly with Spillovers: Erratum," American Economic Review, American Economic Association, vol. 80(3), pages 641-42, June.
  6. L. Lambertini, 2004. "Innovation and Managerial Incentives: A Tale of Two Systems," Working Papers 498, Dipartimento Scienze Economiche, Universita' di Bologna.
  7. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Levent Kockese & Efe A. Ok, 2002. "Strategic delegation by unobservable incentive contracts," Discussion Papers 0102-26, Columbia University, Department of Economics.
  9. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
  10. Massimo G. Colombo & Marco Delmastro, 2004. "Delegation of Authority In Business Organizations: An Empirical Test," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 53-80, 03.
  11. Corts, Kenneth S. & Neher, Darwin V., 2003. "Credible delegation," European Economic Review, Elsevier, vol. 47(3), pages 395-407, June.
  12. 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).
  13. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
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Cited by:
  1. Yuanzhu Lu & Kangsik Choi, 2010. "A Note on Endogenous Timing with Strategic Delegation: Unilateral Externality Case," CEMA Working Papers 390, China Economics and Management Academy, Central University of Finance and Economics.

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