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A reconsideration of the link between vertical externality and managerial incentives

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  • Denis Claude

Abstract

Previous research revealed that the strategic role of delegation contracts disappears if two quantity†setting firms outsource input production to a monopolistic supplier. I show that this role is restored if the assumption of a downstream duopoly is relaxed. Thus, delegation contracts allow downstream profit†maximizing owners to commit their firms to a behavior that differs from their preferences. This behavior varies nonmonotonically with the number of firms in the downstream market. Corresponding deviations from profit maximization are larger if the upstream monopolist makes a price precommitment. But little to no deviation occurs if the number of firms is large.

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  • Denis Claude, 2018. "A reconsideration of the link between vertical externality and managerial incentives," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 39(5), pages 526-534, July.
    • Handle: RePEc:wly:mgtdec:v:39:y:2018:i:5:p:526-534
    DOI: 10.1002/mde.2923
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    Cited by:

    1. Xingtang Wang & Leonard F.S. Wang, 2021. "External bargaining versus internal manipulation: A theory of managerial delegation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(1), pages 134-142, January.
    2. Denis Claude & Mabel Tidball, 2020. "Managerial Incentives and Polluting Inputs Under Imperfect Competition," International Series in Operations Research & Management Science, in: Pierre-Olivier Pineau & Simon Sigué & Sihem Taboubi (ed.), Games in Management Science, pages 165-186, Springer.
    3. Habiger, Peter & Kopel, Michael, 2020. "Strategic delegation in successive oligopolies with differentiated firms," Economics Letters, Elsevier, vol. 194(C).
    4. Yasuhiro Arai & Noriaki Matsushima, 2023. "The impacts of suppliers and mutual outsourcing on organizational forms," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(1), pages 114-132, February.
    5. Henrik Vetter, 2020. "Incentive pay and rent in oligopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(8), pages 1621-1628, December.
    6. Michael Kopel & Eva Maria Putz, 2021. "Sharing managerial contract information in a vertically related market," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(4), pages 1037-1047, June.

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