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Adverse Selection And Managerial Incentives


  • Javier M. López Cuñat

    (Universidad de Alicante)


We analyze managerial contracts (i.e. incentive schemes based on a linear combination of profits and sales) under asymmetric information about costs. In the competitive setting with ex ante symmetric information, standard strategic effects appear. Under adverse selection in both, monopolistic and competitive settings, we show that, in order to decrease the manager's expected informational rents, the owner will optimally pay the manager to keep sales low or, on the contrary, keep them high. Moreover, the interactions between the strategic and the informational rent effects have a non-additive nature, implying non-standard results. Unlike the monopolistic framework, we show that, in the competitive framework, the manager may become aggressive under ex ante symmetric information than under adverse selection. Unlike the setting with ex ante symmetric information, we show that, under adverse selection, the manager may become more aggressive in the monopolistic framework than in the competitive one.

Suggested Citation

  • Javier M. López Cuñat, 2000. "Adverse Selection And Managerial Incentives," Working Papers. Serie AD 2000-09, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  • Handle: RePEc:ivi:wpasad:2000-09

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    References listed on IDEAS

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    5. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-147, Supplemen.
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    7. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    8. 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.
    9. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
    10. Conyon, Martin J., 1997. "Corporate governance and executive compensation," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 493-509, July.
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