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Investment decisions and managerial compensation design in the presence of product market rivalry

Author

Listed:
  • Gregory E. Goering

    (Department of Economics, University of Alaska, Fairbanks, AK, USA)

  • T. Harikumar

    (Department of Finance, University of Alaska, Fairbanks, AK, USA)

Abstract

We consider an economy where firms operate in an imperfectly competitive industry and mutually affect each others' investment opportunities. Each firm is assumed to face a mutually exclusive choice of investing in either a short- or a long-term project. For example, firm i's commitment to a short-term project cuts into firm j's market in the short-term but frees-up firm j's long-term market, and vice versa. Our results show that, even in the absence of an owner-manager conflict, the owner anticipates the product market rivalry and optimally compensates their managers with short- as well as long-term compensation. Although the optimal compensation design induces myopic investment decisions, it is shown to be in the owners' best interest. Copyright © 1999 John Wiley & Sons, Ltd.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:mgtdec:v:20:y:1999:i:2:p:87-97
    DOI: 10.1002/(SICI)1099-1468(199903)20:2<87::AID-MDE919>3.0.CO;2-D
    as

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    References listed on IDEAS

    as
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