Managerial Incentives and Product Market Competition

Klaus Schmidt ()

No 1382, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The paper shows that an increase in competition has two effects on managerial incentives: it increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the firm’s profits, which may make it less attractive to induce high effort. Thus, the total effect is ambiguous. The paper identifies natural circumstances where increased competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple example demonstrates that – starting from a monopoly – managerial effort may increase as additional competitors enter the market, but will eventually decrease when competition becomes too intense.

Keywords: Competition; Managerial Incentives; Moral Hazard (search for similar items in EconPapers)
JEL-codes: D20 L14 (search for similar items in EconPapers)
Date: 1996-04
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Citations: View citations in EconPapers (7)

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Journal Article: Managerial Incentives and Product Market Competition (1997)
Working Paper: Managerial Incentives and Product Market Competition (1997)
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