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Relative Performance Evaluation, Risk Aversion and Entry

Author

Listed:
  • Jean-Daniel Guigou
  • Bruno Lovat
  • Gwenaël Piase

Abstract

We study the relations between compensation schemes and risk aversion of managers in a strategic framework. We first show that the use of relative performance evaluation (RPE) in compensation contracts reduces the equilibrium profits of Cournot firms if managers are not too risk averse. Second, we introduce entry issues in our model. We then show that forbidding RPE can favour competition.

Suggested Citation

  • Jean-Daniel Guigou & Bruno Lovat & Gwenaël Piase, 2007. "Relative Performance Evaluation, Risk Aversion and Entry," Working Papers of BETA 2007-26, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  • Handle: RePEc:ulp:sbbeta:2007-26
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    File URL: http://www.beta-umr7522.fr/productions/publications/2007/2007-26.pdf
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    Keywords

    Executive Compensation; Relative Performance Evaluation; Moral Hazard; Market Structure.;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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