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Labour incentive schemes in a Cournot duopoly with simple institutional constraints

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  • Luciano Fanti
  • Nicola Meccheri

Abstract

This paper studies equilibrium incentive contracts in a Cournot duopoly, in which institutional arrangements constrain firms to pay (risk-neutral) workers a given salary. In this context, performance-related-pay (PRP) and relative performance evaluation (RPE) are compared in terms of resulting levels of workers’ effort (firms’ expected output), market price, profits, consumer surplus and social welfare. It is shown that, while under principal-agent standard assumptions (i.e. all wage components are “freely” negotiated by each firm-worker pair) PRP and RPE are equivalent, in the presence of institutional “frictions”, RPE outperforms PRP in relation to output, profits, consumer surplus and social welfare. Moreover, RPE also permits to replicate results obtained without institutional constraints, even if the mechanism driving final outcomes is very different.

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Bibliographic Info

Paper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2010/103.

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Date of creation: 10 Sep 2010
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Handle: RePEc:pie:dsedps:2010/103

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Keywords: Cournot duopoly; principal-agent model; relative performance evaluation; institutional constraints.;

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  1. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2007. "Endogenous Strategic Managerial Incentive Contracts," Working Papers 0706, University of Crete, Department of Economics.
  2. Giuseppe Nicoletti & Andrea Bassanini & Ekkehard Ernst & Sébastien Jean & Paulo Santiago & Paul Swaim, 2001. "Product and Labour Markets Interactions in OECD Countries," OECD Economics Department Working Papers 312, OECD Publishing.
  3. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2010. "Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(8), pages 531-543, December.
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