Long‐Term or Short‐Term Managerial Incentive Contracts

Juan Carlos Barcena‐Ruiz and Maria Paz Espinosa
Authors registered in the RePEc Author Service: Juan Carlos Bárcena-Ruiz

Journal of Economics & Management Strategy, 1996, vol. 5, issue 3, 343-359

Abstract: This paper deals with the strategic role of the temporal dimension of contracts in a duopoly market. Is it better for a firm to sign long‐term incentive contracts with managers or short‐term contracts? For the linear case, with strategic substitutes (complements) in the product market, the incentive variables are also strategic substitutes (complements). It is shown that a long‐term contract makes a firm a leader in incentives, while a short‐term contract makes it a follower. We find that, under Bertrand competition, in equilibrium one firm signs a long‐term contract and the other firm short‐term incentive contracts; however, under Cournot competition, the dominant strategy is to sign long‐term incentive contracts.

Date: 1996
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Citations: View citations in EconPapers (19)

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https://doi.org/10.1111/j.1430-9134.1996.00343.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jemstr:v:5:y:1996:i:3:p:343-359

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