Investment choice with managerial incentive schemes

Shubhro Sarkar () and Suchismita Tarafdar ()
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Shubhro Sarkar: Indira Gandhi Institute of Development Research
Suchismita Tarafdar: Shiv Nadar University

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: In this paper we show that firms might get an additional strategic benefit from using marginal-cost-reducing investments in conjunction with a managerial incentive scheme. While both these instruments allow firms to \aggressively" participate in product market competition, we show that they act as strategic substitutes or complements depending on whether they are chosen simultaneously or sequentially under complete information. Given that the use of such instruments is inseparably linked with a Prisoner's Dilemma kind of situation, our analysis shows a way to mitigate such effects, through heir simultaneous use.

Keywords: Strategic delegation; Cost-Reducing Investment; Strategic Substitutes; Strategic complements; Subgame perfection (search for similar items in EconPapers)
JEL-codes: C72 D43 L13 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2018-03
New Economics Papers: this item is included in nep-com, nep-gth, nep-knm and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:ind:igiwpp:2018-008

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