Managerial Incentives and Product Market Competition
This paper shows that an increase in competition has two effects on managerial incentives: it increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the firm's profits, which may make it less attractive to induce high effort. Thus, the total effect is ambiguous. The author identifies natural circumstances where increasing competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple example demonstrates that--starting from a monopoly--managerial effort may increase as additional competitors enter the market, but will eventually decrease when competition becomes too intense. Copyright 1997 by The Review of Economic Studies Limited.
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Volume (Year): 64 (1997)
Issue (Month): 2 (April)
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