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Endogenous Managerial Contract

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Author Info
Marcello D'Amato () (Università di Salerno, CSEF and CEPR)
Riccardo Martina () (Università di Napoli Federico II and CSEF)
Salvatore Piccolo () (Università di Salerno, CSEF and Northwestern University,)

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Abstract

The relationship between managerial incentives and product market competition is studied in an imperfectly competitive industry where two managerial .rms, compete by setting quantities. Owners simultaneously choose between two contractual regimes: a cost-based and a profit-based one, while privately informed managers perform an unveri.able cost-reducing activity and choose quantities. We characterize the incentive properties of alternative managerial remuneration schemes owners may use to control managers.behavior and we study the equilibrium relationship between owners’ and managers’ choices, efficiency and market competition. It is showed that a competing-contracts effect, at play under profit target, may induce firm owners not to select the constrained efficient allocation in the pre-specified set of contracts. Moreover, under profit-based schemes a pure agency effect, at play directly through information rents, drives a positive impact of competition on managerial effort. As a result an inverted-U shaped relationship between product market competition, managerial effort and agency costs obtains, thus leading to marginal costs convex with respect to a measure of competition.

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Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 148.

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Date of creation: 01 Nov 2005
Date of revision: 01 Jul 2006
Publication status: Published in International Journal of Industrial Organization, 2008, Vol. 26, Issue 6, Pages 1257-1460
Handle: RePEc:sef:csefwp:148

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Related research
Keywords: competing contracts; cost-target; managerial .rms; pro.t-target; product market competition; vertical hierarchies; X-inefficiency;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Salvatore Piccolo & David Martimort, 2006. "The Strategic Value of Incomplete Contracting in a Competing Hierarchies Environment," CSEF Working Papers 160, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 08 Dec 2006. [Downloadable!]
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