COST-SAVING PRODUCTION TECHNOLOGIES AND STRATEGIC DELEGATION *

Juan Carlos Bárcena-Ruiz and Norma Olaizola

Australian Economic Papers, 2006, vol. 45, issue 2, pages 141-157

Abstract: This work analyses a managerial delegation model in which firms choose between two production technologies: a low marginal cost technology and a high marginal cost technology. For the former to be adopted more investment is needed than for the later. By giving managers of firms an incentive scheme based on a linear combination of profit and sales revenue, we find that Bertrand competition provides a stronger incentive to adopt the cost-saving technology than the strict profit maximisation case. However, the results may be reversed under Cournot competition. If the degree of product substitutability is sufficiently low (high), the incentive to adopt the cost-saving technology is larger under strict profit maximisation (strategic delegation). Copyright Blackwell Publishing Ltd/University of Adelaide and Flinders University 2006..

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