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Investment decisions and managerial compensation design in the presence of product market rivalry

Gregory E. Goering and T. Harikumar
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Gregory E. Goering: Department of Economics, University of Alaska, Fairbanks, AK, USA, Postal: Department of Economics, University of Alaska, Fairbanks, AK, USA
T. Harikumar: Department of Finance, University of Alaska, Fairbanks, AK, USA, Postal: Department of Finance, University of Alaska, Fairbanks, AK, USA

Managerial and Decision Economics, 1999, vol. 20, issue 2, 87-97

Abstract: We consider an economy where firms operate in an imperfectly competitive industry and mutually affect each others' investment opportunities. Each firm is assumed to face a mutually exclusive choice of investing in either a short- or a long-term project. For example, firm i's commitment to a short-term project cuts into firm j's market in the short-term but frees-up firm j's long-term market, and vice versa. Our results show that, even in the absence of an owner-manager conflict, the owner anticipates the product market rivalry and optimally compensates their managers with short- as well as long-term compensation. Although the optimal compensation design induces myopic investment decisions, it is shown to be in the owners' best interest. Copyright © 1999 John Wiley & Sons, Ltd.

Date: 1999
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Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:20:y:1999:i:2:p:87-97

DOI: 10.1002/(SICI)1099-1468(199903)20:2<87::AID-MDE919>3.0.CO;2-D

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