Competitive Pressure, Incentives and Managerial Rewards

Marcello D'Amato, Riccardo Martina and Salvatore Piccolo ()

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: The paper examines the equilibrium relationship between managerial incentives and product market competition in imperfectly competitive industries. In a simple managerial economy, where owners simultaneously choose reward schemes and managers are privately informed on firms. production technologies, it is showed that a competing-contracts effect, at play under high powered incentive schemes (contracts based on firms’ profits), may induce competitive pressure to elicit managerial effort. An inverted-U shaped relationship between product market competition, managerial effort and agency costs thus obtains when contracts are based on firms’ profits. Remarkably, whenever competition is strong enough, low powered incentive schemes (contracts based on production costs) may survive in equilibrium with detrimental effects on welfare.

Keywords: competing contracts; cost-target; managerial .rms; pro.t-target; product market competition; vertical hierarchies; X-inefficiency (search for similar items in EconPapers)
JEL-codes: D82 L13 L22 (search for similar items in EconPapers)
Date: 2005-11-01, Revised 2006-07-01
New Economics Papers: this item is included in nep-bec, nep-com, nep-mic and nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in International Journal of Industrial Organization, 2008, Vol. 26, Issue 6, Pages 1257-1460

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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:148

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