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Heterogeneity in Organizational Form: Why Otherwise Identical Firms Choose Different Incentives for Their Managers

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  • Benjamin E. Hermalin.

Abstract

Product-market competition affects the benefits from providing incentives to managers. In particular, the best response to other firms providing strong incentives can be to provide weak incentives. Conversely, the best response to other firms providing weak incentives can be to provide strong incentives. In equilibrium only a fraction of the firms may, therefore, provide strong incentives. Moreover, all equilibria may exhibit heterogeneity in incentives due to the nonconvexities inherent in the underlying agency problem between firms and their managers. This article also investigates how increased competition affects the strength of the incentives provided in the equilibrium.

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Bibliographic Info

Paper provided by University of California at Berkeley in its series Economics Working Papers with number 92-193.

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Date of creation: 01 May 1992
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Handle: RePEc:ucb:calbwp:92-193

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Postal: University of California at Berkeley, Berkeley, CA USA
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Cited by:
  1. Boyer, Marcel & Laffont, Jean-Jacques, 2003. "Competition and the reform of incentive schemes in the regulated sector," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2369-2396, September.
  2. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
  3. Wallace HUFFMAN & Richard E. JUST, 1995. "Transaction Costs, Fads, And Politically Motivated Misdirection In Agricultural Research," Staff Papers 277, Iowa State University Department of Economics.
  4. AMIR, Rabah & GARCIA, Filomena & KNAUFF, Malgorzata, 2006. "Endogenous heterogeneity in strategic models: symmetry-breaking via strategic substitutes and nonconcavities," CORE Discussion Papers 2006008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Cronqvist, Henrik & Low, Angie & Nilsson, Mattias, 2007. "Does Corporate Culture Matter for Firm Policies?," SIFR Research Report Series 48, Institute for Financial Research.
  6. Amihai Glazer & Vesa Kanniainen & Panu Poutvaara, 2004. "Initial Luck, Status-Seeking and Snowballs Lead to Corporate Success and Failure," CESifo Working Paper Series 1216, CESifo Group Munich.
  7. Yijiang Wang, . "Demand, Supply and Coordination: An Integrated Theory of the Division of Labor," Working Papers 0405, Human Resources and Labor Studies, University of Minnesota (Twin Cities Campus).
  8. Siemens, Ferdinand von, 2005. "Fairness, Adverse Selection, and Employment Contracts," Discussion Papers in Economics 669, University of Munich, Department of Economics.
  9. Cronqvist, Henrik & Low, Angie & Nilsson, Mattias, 2007. "Does Corporate Culture Matter for Firm Policies?," Working Paper Series 2007-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  10. Walter A Cont, 2001. "Essays on Contract Design: Delegation and Agency Problems, and Monitoring Under Collusion," Levine's Working Paper Archive 625018000000000122, David K. Levine.
  11. Jovanovic, Dragan, 2014. "Mergers, managerial incentives, and efficiencies," DICE Discussion Papers 88 [rev.], Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
  12. Federico Etro, 2010. "Endogenous Market Structures and Contract Theory," Working Papers 181, University of Milano-Bicocca, Department of Economics, revised Mar 2010.
  13. Graziano, Clara & Parigi, Bruno M., 1998. "Do managers work harder in competitive industries?," Journal of Economic Behavior & Organization, Elsevier, vol. 34(3), pages 489-498, March.

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