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Labour incentive schemes in a Cournot duopoly with simple institutional constraints

Luciano Fanti () and Nicola Meccheri ()

Discussion Papers from Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy

Abstract: This paper studies equilibrium incentive contracts in a Cournot duopoly, in which institutional arrangements constrain firms to pay (risk-neutral) workers a given salary. In this context, performance-related-pay (PRP) and relative performance evaluation (RPE) are compared in terms of resulting levels of workers' effort (firms' expected output), market price, profits, consumer surplus and social welfare. It is shown that, while under principal-agent standard assumptions (i.e. all wage components are "freely" negotiated by each firm-worker pair) PRP and RPE are equivalent, in the presence of institutional "frictions", RPE outperforms PRP in relation to output, profits, consumer surplus and social welfare. Moreover, RPE also permits to replicate results obtained without institutional constraints, even if the mechanism driving final outcomes is very different.

Keywords: Cournot duopoly; principal-agent model; relative performance evaluation; institutional constraints. (search for similar items in EconPapers)
JEL-codes: J33 J41 L13 (search for similar items in EconPapers)
Date: 2010-09-10
New Economics Papers: this item is included in nep-bec and nep-cta
Note: ISSN 2039-1854
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Working Paper: Labour Incentive Schemes in a Cournot Duopoly with Simple Institutional Constraints (2010) Downloads
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