Investment decisions and managerial compensation design in the presence of product market rivalry

✍ Scribed by Gregory E. Goering; T. Harikumar

• Publisher: John Wiley and Sons
• Year: 1999
• Tongue: English
• Weight: 108 KB
• Volume: 20
• Category: Article
• ISSN: 0143-6570
• DOI: 10.1002/(sici)1099-1468(199903)20:2<87::aid-mde919>3.0.co;2-d

✦ Synopsis

We consider an economy where firms operate in an imperfectly competitive industry and mutually affect each others' investment opportunities. Each firm is assumed to face a mutually exclusive choice of investing in either a short-or a long-term project. For example, firm i's commitment to a short-term project cuts into firm j's market in the short-term but frees-up firm j's long-term market, and 7ice 7ersa. Our results show that, even in the absence of an owner-manager conflict, the owner anticipates the product market rivalry and optimally compensates their managers with short-as well as long-term compensation. Although the optimal compensation design induces myopic investment decisions, it is shown to be in the owners' best interest.