Long-Term or Short-Term Managerial Incentive Contracts
This paper deals with the strategic role of the temporal dimension of contracts in a duopoly market. Is it better for a firm to sign long-term incentive contracts with managers or short-term contracts? For the linear case, with strategic substitutes (complements) in the product market, the incentive variables are also strategic substitutes (complements). It is shown that a long-term contract makes a firm a leader in incentives, while a short-term contract makes it a follower. We find that, under Bertrand competition, in equilibrium one firm signs a long-term contract and the other firm short-term incentive contracts; however, under Cournot competition, the dominant strategy is to sign long-term incentive contracts. Copyright 1996 The Massachusetts Institute of Technology.
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Volume (Year): 5 (1996)
Issue (Month): 3 (09)
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