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Contract Competition between Hierarchies, Managerial Compensation and Imperfectly Correlated Shocks

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  • Michela, Cella
  • Federico, Etro

Abstract

We analyze competition through incentive contracts for managers in duopoly. Privately informed managers exert surplus enhancing e¤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 di¤erentials in managerial compensations between efficient and inefficient managers. In the second case, as with large contractual spillovers, the opposite occurs.

Suggested Citation

  • Michela, Cella & Federico, Etro, 2016. "Contract Competition between Hierarchies, Managerial Compensation and Imperfectly Correlated Shocks," Working Papers 328, University of Milano-Bicocca, Department of Economics, revised 07 Feb 2016.
  • Handle: RePEc:mib:wpaper:328
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    References listed on IDEAS

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    Keywords

    oligopoly; screening; two way distortion; incentives; investments;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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