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Stock Options and the Strategic Use of Managerial Incentives

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  • Reitman, David

Abstract

In Cournot-based oligopoly models there is an incentive for firms to pursue overly aggressive behavior, resulting in prices and profits below those of the Cournot equilibrium. Compensating managers in proportion to a combination of profits and sales provides one mechanism through which aggressive behavior emerges. However, when the profit component of managerial compensation comes in the form of stock options, the aggressive behavior is restrained or even eliminated in equilibrium. This result relies only on the nonlinearity of the stock option; generalizations to other forms of compensation are discussed. Copyright 1993 by American Economic Association.

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  • Reitman, David, 1993. "Stock Options and the Strategic Use of Managerial Incentives," American Economic Review, American Economic Association, vol. 83(3), pages 513-524, June.
  • Handle: RePEc:aea:aecrev:v:83:y:1993:i:3:p:513-24
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    Cited by:

    1. Robert A. Ritz, 2014. "On Welfare Losses Due to Imperfect Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 62(1), pages 167-190, March.
    2. L. Lambertini, 2004. "Innovation and Managerial Incentives: A Tale of Two Systems," Working Papers 498, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Shinn-Shyr Wang & Kyle W. Stiegert & Tirtha P. Dhar, 2010. "Strategic Pricing Behavior under Asset Value Maximization," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 58(2), pages 151-170, June.
    4. Aghion, Philippe & Dewatripont, Mathias & Legros, Patrick & Zingales, Luigi (ed.), 2016. "The Impact of Incomplete Contracts on Economics," OUP Catalogue, Oxford University Press, number 9780199826216.
    5. Lee, Gea M., 2010. "Optimal collusion with internal contracting," Games and Economic Behavior, Elsevier, vol. 68(2), pages 646-669, March.
    6. Matthew J. Clayton & Bjorn N. Jorgensen, 1998. "Cross Holding and Imperfect Product Markets," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-020, New York University, Leonard N. Stern School of Business-.
    7. Marc C. Chopin & Ross N. Dickens & Roger M. Shelor, 1995. "An Empirical Examination of Compensation of REIT Managers," Journal of Real Estate Research, American Real Estate Society, vol. 10(3), pages 263-278.
    8. Kraus, Alan & Rubin, Amir, 2010. "Reducing managers' incentives to cannibalize: Managerial stock options when shareholders are diversified," Journal of Financial Intermediation, Elsevier, vol. 19(4), pages 439-460, October.
    9. Patrick Legros & Andrew F. Newman, 2014. "Contracts, Ownership, and Industrial Organization: Past and Future," Journal of Law, Economics, and Organization, Oxford University Press, vol. 30(suppl_1), pages 82-117.
    10. Baik, Kyung Hwan & Kim, In-Gyu, 1997. "Delegation in contests," European Journal of Political Economy, Elsevier, vol. 13(2), pages 281-298, May.
    11. Ahmed Ennasri, 2010. "Incitations Managériales et Concurrence : Synthèse de la Littérature," Studies and Syntheses 10-03, LAMETA, Universtiy of Montpellier, revised Oct 2010.
    12. Hamilton, Stephen F & Stiegert, Kyle, 2000. "Vertical Coordination, Antitrust Law, and International Trade," Journal of Law and Economics, University of Chicago Press, vol. 43(1), pages 143-156, April.
    13. Eun-Soo Park, 2002. "Vertical externality and strategic delegation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(3), pages 137-141.
    14. Dasgupta, Sudipto & Shin, Jhinyoung, 2004. "Managerial risk-taking incentives, product market competition and welfare," European Economic Review, Elsevier, vol. 48(2), pages 391-401, April.
    15. Kirstein, Roland & Kirstein, Annette, 2004. "Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies," CSLE Discussion Paper Series 2004-09, Saarland University, CSLE - Center for the Study of Law and Economics.
    16. Jaideep Chowdhury, 2014. "Impact of financial constraint on incentive compensation and product market behavior," Economics Bulletin, AccessEcon, vol. 34(1), pages 115-124.
    17. Neubecker, Leslie, 2001. "Aktienkursorientierte Management-Entlohnung: Ein Wettbewerbshemmnis im Boom?," Tübinger Diskussionsbeiträge 225, University of Tübingen, School of Business and Economics.
    18. Neubecker, Leslie, 2002. "Aktienkursorientierte Management-Entlohnung bei korrelierter Entwicklung der Marktnachfrage," Tübinger Diskussionsbeiträge 235, University of Tübingen, School of Business and Economics.
    19. Spagnolo, Giancarlo, 2005. "Managerial incentives and collusive behavior," European Economic Review, Elsevier, vol. 49(6), pages 1501-1523, August.
    20. Ziss, Steffen, 1999. "Divisionalization and strategic managerial incentives in oligopoly under uncertainty," International Journal of Industrial Organization, Elsevier, vol. 17(8), pages 1163-1187, November.
    21. Gregory E. Goering & T. Harikumar, 1999. "Investment decisions and managerial compensation design in the presence of product market rivalry," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 20(2), pages 87-97.

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