Managerial Incentives and Product Market Competition

Klaus Schmidt ()

The Review of Economic Studies, 1997, vol. 64, issue 2, 191-213

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. I identify natural circumstances where increasing 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.

Date: 1997
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Working Paper: Managerial Incentives and Product Market Competition (1997)
Working Paper: Managerial Incentives and Product Market Competition (1996)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:64:y:1997:i:2:p:191-213.

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