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Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment

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Author Info

  • 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)

Abstract

In a differentiated Cournot duopoly, we examine the contracts that firms' owners use to compensate their managers and the resulting output levels, profits and social welfare. If products are either sufficiently differentiated or sufficiently close substitutes, owners use Relative Performance contracts. For intermediate levels of product substitutability, they use Market Share contracts. When owners do not commit over the types of contracts, each type is an owner's best response to his rival's choice. Product substitutability has differential effects on output levels and profits, depending on the configuration of contracts in the industry. Finally, managerial incentive contracts are welfare enhancing if they increase consumers' surplus.

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Bibliographic Info

Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0905.

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Date of creation: 15 Jun 2009
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Handle: RePEc:crt:wpaper:0905

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Keywords: Oligopoly; Managerial delegation; Endogenous contracts;

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References

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  1. Katz, Michael L., 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," Department of Economics, Working Paper Series qt79b870w0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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  4. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 1999-2043, December.
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  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. Jansen, Thijs & van Lier, Arie & van Witteloostuijn, Arjen, 2007. "A note on strategic delegation: The market share case," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 531-539, June.
  8. Thijs Jansen & Arie van Lier & Arjen van Witteloostuijn, 2009. "On the impact of managerial bonus systems on firm profit and market competition: the cases of pure profit, sales, market share and relative profits compared," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(3), pages 141-153.
  9. Miller, Nolan H & Pazgal, Amit I, 2001. "The Equivalence of Price and Quantity Competition with Delegation," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 284-301, Summer.
  10. Robert Gibbons & Kevin Murphy, 1989. "Relative Performance Evaluation for Chief Executive Officers," Working Papers 628, Princeton University, Department of Economics, Industrial Relations Section..
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  13. Sung Wook Joh, 1999. "Strategic Managerial Incentive Compensation In Japan: Relative Performance Evaluation And Product Market Collusion," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 303-313, May.
  14. Miller, Nolan H. & Pazgal, Amit, 2005. "Strategic trade and delegated competition," Journal of International Economics, Elsevier, vol. 66(1), pages 215-231, May.
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Cited by:
  1. Luciano Fanti & Nicola Meccheri, 2010. "Labour incentive schemes in a Cournot duopoly with simple institutional constraints," Discussion Papers 2010/103, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  2. 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).
  3. Michael Kopel & Luca Lambertini, 2013. "On Price Competition with Market Share Delegation Contracts," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(1), pages 40-43, 01.
  4. 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.
  5. Evangelos Mitrokostas & Emmanuel Petrakis, 2011. "Organizational structure, strategic delegation and innovation in oligopolistic industries," Working Papers 2011/09, Economics Department, Universitat Jaume I, Castellón (Spain).
  6. Chirco, Alessandra & Scrimitore, Marcella, 2013. "Choosing price or quantity? The role of delegation and network externalities," Economics Letters, Elsevier, vol. 121(3), pages 482-486.

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