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Managerial Incentives and Product Market Competition

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  • Schmidt, Klaus M.

Abstract

The 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 paper identifies natural circumstances where increased 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.

Suggested Citation

  • Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1382
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    Keywords

    Competition; Managerial Incentives; Moral Hazard;

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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