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Labour Incentive Schemes in a Cournot Duopoly with Simple Institutional Constraints

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Luciano Fanti & Nicola Meccheri, 2010. "Labour Incentive Schemes in a Cournot Duopoly with Simple Institutional Constraints," Working Paper series 38_10, Rimini Centre for Economic Analysis.
    • Handle: RePEc:rim:rimwps:38_10
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Cournot duopoly; principal-agent model; relative performance evaluation; institutional constraints;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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