OBSERVABLE MANAGERIAL INCENTIVES AND SPATIAL COMPETITION

Domenico Scalera and Alberto Zazzaro ()

Metroeconomica, 2008, vol. 59, issue 1, pages 27-41

Abstract: In this paper we investigate the relationship between product market competition and managerial incentives within a circular city model with observable agency contracts. With respect to the case of unobservability studied by Raith (2003), we find that optimal managerial contracts provide lower incentives, and that equilibrium expected prices and profits are higher. Changes in competition fundamentals have ambiguous effects, but observable contracts alleviate their impact on incentives. Finally, observability involves three major implications: managerial incentives are higher under price regulation than under competition; prices may increase with the number of firms; consumer welfare may diminish when competition increases. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.

Date: 2008

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