Managerial compensation contracts in quantity-setting duopoly
In the context of a quantity setting duopoly we experimentally test the ability of managerial compensation schemes to provide a commitment device leading to a more aggressive behavior in the product market. In line with our model, Relative Performance-based rewards are chosen more frequently than Profit-Revenue ones. Furthermore, output reacts to the contract terms in the expected way, although it tends to exceed the predicted levels. Other quantitative aspects of the model receive less support, especially because firm owners tend to use more balanced weights for their managers' induced objectives than the theory predicts. Overall, quantity setting behavior is more aggressive than the theory predicts.
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