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Effects of impefect competition on contractual design in the presence of private information

Author

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  • BARROS, Fatima

    (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

Abstract

The present work analyzes the effect of competition on managerial incentives when agents have private information about the firms' productivities. Two types of firms are considered: managerial firms (delegation) and entrepreneurial firms (no delegation). Due to the asymmetry of information managerial firms are less efficient (productive efficiency) than entrepreneurial firms and entrepreneurial firms competition may actually reduce the managerial firms' productive inefficiency. When a non-profit maximizing firm (managerial type) is present in the market, the net effect in terms of social welfare is ambiguous: if the number of competing firms is high enough to introduce a non-profit maximizer is not worthwhile since the extra cost in terms of informational rent is not outweighed by sufficiently high increase of the quantity produced. The non-profit maximizing firm introduces a trade-off between allocative efficiency and productive inefficiency. Under the assumption of imperfect correlation we show that expected social welfare is a decreasing function of the correlation degree between firms' productivities. Moreover managerial informational rents are larger when firms' productivities are positively correlated.

Suggested Citation

  • BARROS, Fatima, 1992. "Effects of impefect competition on contractual design in the presence of private information," CORE Discussion Papers 1992015, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1992015
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-1992.html
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    Keywords

    Mixed oligopoly; Delegation; Asymmetry of information;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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