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Endogenous Managerial Incentive Contracts in a Differentiated Duopoly, With and Without Commitment

Author

Listed:
  • Constantine Manasakis
  • Evangelos Mitrokostas
  • Emmanuel Petrakis

    () (Department of Economics, University of Crete, Greece)

Abstract

In a differentiated Cournot duopoly, we examine the contracts that firms' owners use to compensate their managers and the resulting output levels, profits and social welfare. If products are either sufficiently differentiated or sufficiently close substitutes, owners use Relative Performance contracts. For intermediate levels of product substitutability, they use Market Share contracts. When owners do not commit over the types of contracts, each type is an owner's best response to his rival's choice. Product substitutability has differential effects on output levels and profits, depending on the configuration of contracts in the industry. Finally, managerial incentive contracts are welfare enhancing if they increase consumers' surplus. Copyright (C) 2010 John Wiley & Sons, Ltd.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2009. "Endogenous Managerial Incentive Contracts in a Differentiated Duopoly, With and Without Commitment," Working Papers 0905, University of Crete, Department of Economics.
  • Handle: RePEc:crt:wpaper:0905
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    File URL: http://economics.soc.uoc.gr/wpa/docs/0905.pdf
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    References listed on IDEAS

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    1. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
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    4. Thijs Jansen & Arie van Lier & Arjen van Witteloostuijn, 2009. "On the impact of managerial bonus systems on firm profit and market competition: the cases of pure profit, sales, market share and relative profits compared," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(3), pages 141-153.
    5. Sung Wook Joh, 1999. "Strategic Managerial Incentive Compensation In Japan: Relative Performance Evaluation And Product Market Collusion," The Review of Economics and Statistics, MIT Press, vol. 81(2), pages 303-313, May.
    6. Ritz, Robert A., 2008. "Strategic incentives for market share," International Journal of Industrial Organization, Elsevier, vol. 26(2), pages 586-597, March.
    7. Miller, Nolan H & Pazgal, Amit I, 2001. "The Equivalence of Price and Quantity Competition with Delegation," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 284-301, Summer.
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    10. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence," Journal of Finance, American Finance Association, vol. 54(6), pages 1999-2043, December.
    11. Michael L. Katz, 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 307-328, Autumn.
    12. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    13. Jansen, Thijs & van Lier, Arie & van Witteloostuijn, Arjen, 2007. "A note on strategic delegation: The market share case," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 531-539, June.
    14. Fershtman, Chaim, 1985. "Managerial incentives as a strategic variable in duopolistic environment," International Journal of Industrial Organization, Elsevier, vol. 3(2), pages 245-253, June.
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    16. Levent Koçkesen & Efe A. Ok, 2004. "Strategic Delegation By Unobservable Incentive Contracts," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 397-424.
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    Citations

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    Cited by:

    1. Ya-Chin Wang, 2013. "Optimal R&D Policy and Managerial Delegation Under Vertically Differentiated Duopoly," South African Journal of Economics, Economic Society of South Africa, vol. 81(4), pages 605-624, December.
    2. Luciano Fanti & Nicola Meccheri, 2010. "Labour Incentive Schemes in a Cournot Duopoly with Simple Institutional Constraints," Working Paper series 38_10, Rimini Centre for Economic Analysis.
    3. Evangelos Mitrokostas & Emmanuel Petrakis, 2014. "Organizational structure, strategic delegation and innovation in oligopolistic industries," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 23(1), pages 1-24, January.
    4. Iván Barreda-Tarrazona & Nikolaos Georgantzís & Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2012. "Managerial compensation contracts in quantity-setting duopoly," Working Papers 2012/17, Economics Department, Universitat Jaume I, Castellón (Spain).
    5. Chirco, Alessandra & Scrimitore, Marcella, 2013. "Choosing price or quantity? The role of delegation and network externalities," Economics Letters, Elsevier, vol. 121(3), pages 482-486.
    6. Michael Kopel & Luca Lambertini, 2013. "On Price Competition with Market Share Delegation Contracts," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 34(1), pages 40-43, January.
    7. Nicola Meccheri & Luciano Fanti, 2012. "Managerial delegation schemes in a duopoly with endogenous production costs: a comparison of sales and relative profit delegation under centralised unionisation," Discussion Papers 2012/137, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    8. Zheng Wang, 2015. "Delegation and Vertical Externalities," Economics Bulletin, AccessEcon, vol. 35(2), pages 1128-1135.
    9. Barreda-Tarrazona, Iván & Georgantzís, Nikolaos & Manasakis, Constantine & Mitrokostas, Evangelos & Petrakis, Emmanuel, 2016. "Endogenous managerial compensation contracts in experimental quantity-setting duopolies," Economic Modelling, Elsevier, vol. 54(C), pages 205-217.
    10. Domenico De Giovanni & Fabio Lamantia, 2016. "Control delegation, information and beliefs in evolutionary oligopolies," Journal of Evolutionary Economics, Springer, vol. 26(5), pages 1089-1116, December.
    11. repec:bla:manchs:v:85:y:2017:i:3:p:282-294 is not listed on IDEAS
    12. Yasuhiko Nakamura, 2015. "Endogenous Choice of Strategic Variables in an Asymmetric Duopoly with Respect to the Demand Functions that Firms Face," Manchester School, University of Manchester, vol. 83(5), pages 546-567, September.

    More about this item

    Keywords

    Oligopoly; Managerial delegation; Endogenous contracts;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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