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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.

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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2000-09.

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Length: 30 pages
Date of creation: Apr 2000
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2000-09
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  1. 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 225-64, April.
  2. Michael L. Katz., 1991. "Game-Playing Agents: Unobservable Contracts as Precommitments," Economics Working Papers 91-172, University of California at Berkeley.
  3. Vickers, John, 1985. "Delegation and the Theory of the Firm," Economic Journal, Royal Economic Society, vol. 95(380a), pages 138-47, Supplemen.
  4. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May.
  5. Ramón Faulí-Oller & Massimo Motta, 1996. "Managerial incentives for takeovers," Working Papers. Serie AD 1996-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  6. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December.
  7. 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.
  8. Conyon, Martin J., 1997. "Corporate governance and executive compensation," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 493-509, July.
  9. Barros, Fatima, 1995. "Incentive schemes as strategic variables: An application to a mixed duopoly," International Journal of Industrial Organization, Elsevier, vol. 13(3), pages 373-386, September.
  10. Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 11-42, April.
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