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Relative performance as a strategic commitment mechanism

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  • Nolan Miller

    (John F. Kennedy School of Government, Harvard University, USA)

  • Amit Pazgal

    (John M. Olin School of Business, Washington University, St. Louis, MO 63130, USA)

Abstract

Can managers' personality traits be of use to profit maximizing firm owners? We investigate the case where managers have a variety of attitudes toward relative performance that are indexed by their type. We consider two stage games where profit maximizing owners select managers in the first stage, and these managers, knowing each other's types, compete in a duopoly game in the second stage. The equilibria of various types of competition are derived and comparisons are made to the standard case where managers are profit maximizers. We show that managers' types can be used as a strategic commitment device that can increase firm profits in certain environments. Copyright © 2002 John Wiley & Sons, Ltd.

Suggested Citation

  • Nolan Miller & Amit Pazgal, 2002. "Relative performance as a strategic commitment mechanism," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(2), pages 51-68.
  • Handle: RePEc:wly:mgtdec:v:23:y:2002:i:2:p:51-68 DOI: 10.1002/mde.1045
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    1. Fumas, Vicente Salas, 1992. "Relative performance evaluation of management : The effects on industrial competition and risk sharing," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 473-489, September.
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    3. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, January.
    4. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    5. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
    6. Kapteyn, Arie & Wansbeek, Tom, 1982. "Empirical evidence on preference formation," Journal of Economic Psychology, Elsevier, vol. 2(2), pages 137-154, June.
    7. Basu, Kaushik, 1995. "Stackelberg equilibrium in oligopoly: An explanation based on managerial incentives," Economics Letters, Elsevier, vol. 49(4), pages 459-464, October.
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