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Do firms' owners delegate both short-run and long-run decisions to their managers in equilibrium?

  • Evangelos Mitrokostas

    ()

    (Department of Economics, University of Crete)

  • Emmanuel Petrakis

    ()

    (Department of Economics, University of Crete, Greece)

The present paper explores the scope of strategic delegation, to the firms' R&D investments and market competition in a Cournot Oligopoly. The firms' owners' have two alternative strategies: either the Full Delegation (FD) one, in which firms' owners delegate both short-run and long-run decisions to their managers, or the Partial Delegation (PD) one, in which firms' owners delegate only short-run decisions to their managers. We investigate which delegation strategy will emerge in equilibrium, under the assumption that there is no credible commitment between the firms' owners over the strategy they will select. We find that the Universal Partial Delegation is never an equilibrium configuration. If the initial unit cost is relatively high (low), the Universal Full Delegation (Coexistence) configuration is the only endogenously emerging equilibrium. However, the above results are sensitive to the existence of the commitment assumption.

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Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0815.

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Date of creation: 17 Jun 2008
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Handle: RePEc:crt:wpaper:0815
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  1. Chaim Fershtman & Kenneth L Judd, 1984. "Equilibrium Incentives in Oligopoly," Discussion Papers 642, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. L. Lambertini, 2004. "Innovation and Managerial Incentives: A Tale of Two Systems," Working Papers 498, Dipartimento Scienze Economiche, Universita' di Bologna.
  3. Katz, Michael L., 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," Department of Economics, Working Paper Series qt79b870w0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Massimo G. Colombo & Marco Delmastro, 2004. "Delegation of Authority In Business Organizations: An Empirical Test," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 53-80, 03.
  5. Bester, H. & Petrakis, E., 1991. "The Incentives for Cost Reduction in a Differentiated Industry," Papers 9136, Tilburg - Center for Economic Research.
  6. d'ASPREMONT, Claude & JACQUEMIN, Alexis, . "Cooperative and noncooperative R&D in duopoly with spillovers: Erratum," CORE Discussion Papers RP -892, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Levent Kockese & Efe A. Ok, 2002. "Strategic delegation by unobservable incentive contracts," Discussion Papers 0102-26, Columbia University, Department of Economics.
  8. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
  9. Bárcena Ruiz, Juan Carlos & Casado Izaga, Francisco Javier, 1999. "Should Owners of Firms Delegate Long-run Decisions?," BILTOKI 1999-11, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
  10. Michael Kopel & Christian Riegler, 2006. "R&D in a strategic delegation game revisited: a note," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 27(7), pages 605-612.
  11. Demsetz, Harold, 1983. "The Structure of Ownership and the Theory of the Firm," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 375-90, June.
  12. Corts, Kenneth S. & Neher, Darwin V., 2003. "Credible delegation," European Economic Review, Elsevier, vol. 47(3), pages 395-407, June.
  13. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
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