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Competition and the Strategic Choice of Managerial Incentives: the Relative Performance Case

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  • Chirco, Alessandra
  • Colombo, Caterina
  • Scrimitore, Marcella

Abstract

In this paper we study the role of market competitiveness in a strategic delegation game in which owners delegate output decisions to managers interested in the firm's relative performance. In particular we study how the optimal delegation scheme - i.e. the distortion from pure profit maximization - is affected by market concentration and the elasticity of market demand. We show that these two indexes of market competitiveness do not alter managerial incentives in the same way: while the optimal degree of delegation decreases as the market becomes less concentrated, it increases as demand becomes more elastic.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19540.

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Date of creation: Dec 2009
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Handle: RePEc:pra:mprapa:19540

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Keywords: Strategic delegation; relative performance; oligopoly; isoelastic demand;

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  1. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, American Economic Association, vol. 77(5), pages 927-40, December.
  2. Caterina Colombo & Alessandra Chirco & Marcella Scrimitore, 2009. "Strategic delegation and market competitiveness," Economics Bulletin, AccessEcon, vol. 29(3), pages 1708-1716.
  3. Fumas, Vicente Salas, 1992. "Relative performance evaluation of management : The effects on industrial competition and risk sharing," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 10(3), pages 473-489, September.
  4. 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.
  5. Schaffer, Mark E., 1989. "Are profit-maximisers the best survivors? : A Darwinian model of economic natural selection," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 12(1), pages 29-45, August.
  6. Fernando Vega Redondo, 1996. "The evolution of walrasian behavior," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 1996-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  7. Nikolaos Georgantz�s & Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2008. "Strategic delegation in experimental duopolies with endogenous incentive contracts," Working Papers, University of Crete, Department of Economics 0809, University of Crete, Department of Economics.
  8. Palomino, Frederic, 2005. "Relative performance objectives in financial markets," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 14(3), pages 351-375, July.
  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. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2007. "Endogenous Strategic Managerial Incentive Contracts," Working Papers, University of Crete, Department of Economics 0706, University of Crete, Department of Economics.
  11. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  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, Elsevier, vol. 25(3), pages 531-539, June.
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