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Market Competition and Lower Tier Incentives

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  • Theilen, Bernd

Abstract

The relationship between competition and performance-related pay has been analysed in single-principal-single-agent models. While this approach yields good predictions for managerial pay schemes, the predictions fail to apply for employees at lower tiers of a firm's hierarchy. In this paper, a principal-multi-agent model of incentive pay is developed which makes it possible to analyze the effect of changes in the competitiveness of markets on lower tier incentive payment schemes. The results explain why the payment schemes of agents located at low and mid tiers are less sensitive to changes in competition when aggregated firm data is used. JEL classification numbers: D82, J21, L13, L22. Keywords: Cournot competition, Contract delegation, Moral hazard, Entry, Market size, Wage cost.

Suggested Citation

  • Theilen, Bernd, 2007. "Market Competition and Lower Tier Incentives," Working Papers 2072/4055, Universitat Rovira i Virgili, Department of Economics.
  • Handle: RePEc:urv:wpaper:2072/4055
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    File URL: http://hdl.handle.net/2072/4055
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    Keywords

    Cournot competition; Contract delegation; Moral hazard; Entry; Market size; Wage cost;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • 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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