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Cost Reduction, Incentives and Market Structure

Elie Appelbaum and Richard Harris

Working Paper from Economics Department, Queen's University

Abstract: This paper considers the implications of alternative managerial incentive function for reducing costs in different market structures. An incentive function relates the income received by managers to the profits attained by the firm. Managers may choose the amount of effort they devote to cost reducing activities. Owners choose the parameters of the incentives function to maximize their own profits. With linear profit-sharing incentives we find that competition has higher higher output and lower cost than monopoly. Either a linear profit-sharing or target-bonus incentives schemes neither the Pareto optimal quantity or cost reduction are attained.

Pages: 37
Date: 1976
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