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Competitive Pressure, Incentives and Managerial Rewards

The paper examines the equilibrium relationship between managerial incentives and product market competition in imperfectly competitive industries. In a simple managerial economy, where owners simultaneously choose reward schemes and managers are privately informed on firms. production technologies, it is showed that a competing-contracts effect, at play under high powered incentive schemes (contracts based on firms’ profits), may induce competitive pressure to elicit managerial effort. An inverted-U shaped relationship between product market competition, managerial effort and agency costs thus obtains when contracts are based on firms’ profits. Remarkably, whenever competition is strong enough, low powered incentive schemes (contracts based on production costs) may survive in equilibrium with detrimental effects on welfare.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 148.

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Date of creation: 01 Nov 2005
Date of revision: 01 Jul 2006
Publication status: Published in International Journal of Industrial Organization, 2008, Vol. 26, Issue 6, Pages 1257-1460
Handle: RePEc:sef:csefwp:148
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