Contract Competition between Hierarchies, Managerial Compensation and Imperfectly Correlated Shocks
We analyze competition through incentive contracts for managers in duopoly. Privately informed managers exert surplus enhancing eÂ¤ort that generates an externality on the rival. Asymmetric information on imperfectly correlated shocks creates a two-way distortion of efforts under strategic substitutability in effort and a double downward distortion under strategic complementarity in effort. In the first case, as with contracts for R&D activity or small contractual spillovers for quantity and price competition, increasing the correlation of types reduces the polarization of contracts and the diÂ¤erentials in managerial compensations between efficient and inefficient managers. In the second case, as with large contractual spillovers, the opposite occurs.
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|Date of revision:||07 Feb 2016|
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