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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)

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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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File URL: http://economics.soc.uoc.gr/wpa/docs/End.Str.Mng.Contracts-Commitment.pdf
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Publisher 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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Related research
Keywords: Oligopoly; Managerial delegation; Endogenous contracts;

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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  1. 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. [Downloadable!] (restricted)
  2. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law & Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
  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. [Downloadable!] (restricted)
    Other versions:
  4. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen. [Downloadable!] (restricted)
  5. Miller, Nolan H. & Pazgal, Amit, 2005. "Strategic trade and delegated competition," Journal of International Economics, Elsevier, vol. 66(1), pages 215-231, May. [Downloadable!] (restricted)
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  7. 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. [Downloadable!]
  8. Ritz, Robert A., 2008. "Strategic incentives for market share," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 586-597, March. [Downloadable!] (restricted)
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  10. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December. [Downloadable!] (restricted)
    Other versions:
  11. Robert Gibbons & Kevin J. Murphy, 1990. "Relative performance evaluation for chief executive officers," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 43(3), pages 30-51, February.
  12. 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. [Downloadable!] (restricted)
  13. 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. [Downloadable!]
  14. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April. [Downloadable!] (restricted)
    Other versions:
  15. Levent Kockesen & Efe A. Ok, 2004. "Strategic Delegation By Unobservable Incentive Contracts," Review of Economic Studies, Blackwell Publishing, vol. 71(2), pages 397-424, 04. [Downloadable!] (restricted)
    Other versions:
  16. 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.
  17. 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. [Downloadable!] (restricted)
    Other versions:
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