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Career Concerns And Competitive Pressure

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  • Fabio Feriozzi

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Abstract

In a duopoly model I study the effects of increased competitive pressure on the implicit incentives provided by career concerns. By building a good reputation, managers are able to capture on the labor market part of the profits that they produce in excess with respect to less talented managers. Increased competition, then, has an ambiguous effect: it raises the reputational concern to the extent that it makes to hire a good manager more valuable. The threat of a hostile takeover is then introduced and it is shown to reduce managerial salary while having a potentially negative effect on ex ante incentives. In particular, it is argued that if alternative governance systems are already available, the threat of a hostile takeover can be harmful.

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we056029.

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Date of creation: Nov 2005
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Handle: RePEc:cte:werepe:we056029

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  1. Luigi Zingales, 1997. "Corporate Governance," NBER Working Papers 6309, National Bureau of Economic Research, Inc.
  2. Boone, J., 2000. "Competition," Discussion Paper, Tilburg University, Center for Economic Research 2000-104, Tilburg University, Center for Economic Research.
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  7. Boone, Jan, 2004. "A New Way to Measure Competition," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4330, C.E.P.R. Discussion Papers.
  8. Andrei Shleifer & Robert W. Vishny, 1995. "A Survey of Corporate Governance," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1741, Harvard - Institute of Economic Research.
  9. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics, University of Munich, Department of Economics 19772, University of Munich, Department of Economics.
  10. Oliver D. Hart, 1983. "The Market Mechanism as an Incentive Scheme," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(2), pages 366-382, Autumn.
  11. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, American Economic Association, vol. 93(4), pages 1425-1436, September.
  12. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(3), pages 461-88, June.
  13. David Scharfstein, 1988. "Product-Market Competition and Managerial Slack," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 147-155, Spring.
  14. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, Elsevier, vol. 11(1-4), pages 5-50, April.
  15. Scharfstein, David, 1988. "The Disciplinary Role of Takeovers," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(2), pages 185-99, April.
  16. Martin Stephen, 1993. "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, Elsevier, Elsevier, vol. 59(2), pages 445-450, April.
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