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Managerial Incentives and Product Market Competition

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  • Schmidt, Klaus M.

Abstract

The paper shows that an increase in competition has two effects on managerial incentives: It increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the firm’s profits, which may make it less attractive to induce high effort. Thus, the total effect is ambiguous. I identify natural circumstances where increasing competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple example demonstrates that-starting from a monopoly-managerial effort may increase as additional competitors enter the market, but will eventually decrease when competition becomes too intense.

Suggested Citation

  • Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenar:19772
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    References listed on IDEAS

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    1. Schmidt Klaus M. & Schnitzer Monika, 1993. "Privatization and Management Incentives in the Transition Period in Eastern Europe," Journal of Comparative Economics, Elsevier, vol. 17(2), pages 264-287, June.
    2. Jean Tirole, 1991. "Privatization in Eastern Europe: Incentives and the Economics of Transition," NBER Chapters,in: NBER Macroeconomics Annual 1991, Volume 6, pages 221-268 National Bureau of Economic Research, Inc.
    3. Roland, Gerard & Verdier, Thierry, 1994. "Privatization in Eastern Europe : Irreversibility and critical mass effects," Journal of Public Economics, Elsevier, vol. 54(2), pages 161-183, June.
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    More about this item

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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