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Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment

✍ Scribed by Constantine Manasakis; Evangelos Mitrokostas; Emmanuel Petrakis

Publisher: John Wiley and Sons
Year: 2010
Tongue: English
Weight: 180 KB
Volume: 31
Category: Article
ISSN: 0143-6570
DOI: 10.1002/mde.1507

No coin nor oath required. For personal study only.

✦ Synopsis

In a differentiated Cournot duopoly, we examine the contracts that firms' owners use to compensate their managers and the resulting output levels, profits and social welfare. If products are either sufficiently differentiated or sufficiently close substitutes, owners use Relative Performance contracts. For intermediate levels of product substitutability, they use Market Share contracts. When owners do not commit over the types of contracts, each type is an owner's best response to his rival's choice. Product substitutability has differential effects on output levels and profits, depending on the configuration of contracts in the industry. Finally, managerial incentive contracts are welfare enhancing if they increase consumers' surplus.

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