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Managerial Incentives and Product Market Competition

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  • Schmidt, Klaus M.
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    Abstract

    The paper shows that an increase in competition has two effects on managerial incentives: It increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the firm’s profits, which may make it less attractive to induce high effort. Thus, the total effect is ambiguous. I identify natural circumstances where increasing competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple example demonstrates that-starting from a monopoly-managerial effort may increase as additional competitors enter the market, but will eventually decrease when competition becomes too intense.

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    Bibliographic Info

    Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19772.

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    Date of creation: 1997
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    Publication status: Published in Review of Economic Studies 2 64(1997): pp. 191-213
    Handle: RePEc:lmu:muenar:19772

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