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Labour Incentive Schemes in a Cournot Duopoly with Simple Institutional Constraints

  • Luciano Fanti

    ()

    (Department of Economics, University of Pisa, Italy)

  • Nicola Meccheri

    ()

    (Department of Economics, University of Pisa, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy)

This paper studies equilibrium incentive contracts in a Cournot duopoly, in which institutional arrangements constrain firms to pay (risk-neutral) workers a given salary. In this context, performance-related-pay (PRP) and relative performance evaluation (RPE) are compared in terms of resulting levels of workers' effort (firms' expected output), market price, profits, consumer surplus and social welfare. It is shown that, while under principal-agent standard assumptions (i.e. all wage components are "freely" negotiated by each firm-worker pair) PRP and RPE are equivalent, in the presence of institutional "frictions", RPE outperforms PRP in relation to output, profits, consumer surplus and social welfare. Moreover, RPE also permits to replicate results obtained without institutional constraints, even if the mechanism driving final outcomes is very different.

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File URL: http://www.rcfea.org/RePEc/pdf/wp38_10.pdf
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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 38_10.

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Date of creation: Jan 2010
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Handle: RePEc:rim:rimwps:38_10
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  1. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2009. "Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment," Working Papers 0905, University of Crete, Department of Economics.
  2. Constantine Manasakis & Evangelos Mitrokostas & Emmanuel Petrakis, 2007. "Endogenous Strategic Managerial Incentive Contracts," Working Papers 0706, University of Crete, Department of Economics.
  3. Giuseppe Nicoletti & Andrea Bassanini & Ekkehard Ernst & S├ębastien Jean & Paulo Santiago & Paul Swaim, 2001. "Product and Labour Markets Interactions in OECD Countries," OECD Economics Department Working Papers 312, OECD Publishing.
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