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Managerial incentives under competitive pressure: Experimental investigation

  • Ahmed Ennasri
  • Marc Willinger

We investigate the effects of competition on managerial incentives and effort in a laboratory experiment. Each owner offers compensation to his manager in two different contexts: monopoly and Cournot duopoly. After accepting the compensation, the manager chooses an effort level to increase the probability of reduced costs of his firm. Theory predicts that the entry of a rival firm in a monopolistic industry affects negatively both the incentive compensation and the effort level. Our experimental findings confirm that the entry of a rival firm reduces the incentive compensation but not the manager’s effort level. However, despite the reduction of the incentive compensation, the manager continues to accept the contract offers and exert the same level of effort.

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File URL: http://www.lameta.univ-montp1.fr/Documents/DR2011-12.pdf
File Function: First version, 2011
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Paper provided by LAMETA, Universtiy of Montpellier in its series Working Papers with number 11-12.

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Length: 34 pages
Date of creation: Jun 2011
Date of revision: Jun 2011
Handle: RePEc:lam:wpaper:11-12
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Web page: http://www.lameta.univ-montp1.fr/

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  1. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  2. Claudia Keser & Marc Willinger, 2007. "Theories of behavior in principal-agent relationships with hidden action," Working Papers 23312, Institut National de la Recherche Agronomique, France.
  3. Januszewski, Silke I. & Köke, Jens & Winter, Joachim K., 1999. "Product market competition, corporate governance and firm performance: an empirical analysis for Germany," ZEW Discussion Papers 99-63, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Martin Stephen, 1993. "Endogenous Firm Efficiency in a Cournot Principal-Agent Model," Journal of Economic Theory, Elsevier, vol. 59(2), pages 445-450, April.
  5. Horn, Henrik & Lang, Harald & Lundgren, Stefan, 1994. "Competition, long run contracts and internal inefficiencies in firms," European Economic Review, Elsevier, vol. 38(2), pages 213-233, February.
  6. François Cochard & Marc Willinger, 2005. "Fair Offers in a Repeated Principal-Agent Relationship with Hidden Actions," Economica, London School of Economics and Political Science, vol. 72(286), pages 225-240, 05.
  7. Michael Raith, 2003. "Competition, Risk, and Managerial Incentives," American Economic Review, American Economic Association, vol. 93(4), pages 1425-1436, September.
  8. repec:lmu:muenar:19529 is not listed on IDEAS
  9. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
  10. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  11. David Scharfstein, 1988. "Product-Market Competition and Managerial Slack," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 147-155, Spring.
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