A reconsideration of the link between vertical externality and managerial incentives

Abstract

Previous research revealed that the strategic role of delegation contracts disappears if two quantity‐setting firms outsource input production to a monopolistic supplier. I show that this role is restored if the assumption of a downstream duopoly is relaxed. Thus, delegation contracts allow downstream profit‐maximizing owners to commit their firms to a behavior that differs from their preferences. This behavior varies nonmonotonically with the number of firms in the downstream market. Corresponding deviations from profit maximization are larger if the upstream monopolist makes a price precommitment. But little to no deviation occurs if the number of firms is large.

Managerial Incentives and Polluting Inputs Under Imperfect Competition

“…The above proposition extends previous results by Claude (2018), that were established under the assumption that there is no pollution (ε = 1). It states that downstream owners oer compensation schemes that favor sale orientation over prot maximization if the upstream monopolist makes a price precommitment.…”

“…This is the same expression as found by Claude (2018). Finally, still assuming that k is given, we cannot exclude that α c might be negative for some parameter values.…”

“…We remark that Points 3(a) and (b) in Proposition 2 include as special cases results by Claude (2018) which correspond to the model without pollution (ε = 1). Assuming that α i = α f for all i = 1, 2, .…”

“…This conclusion is backed by Wang (2015), who proves it true when compensation contracts reward the manager's performance relative to peers. " Finally, Claude (2018) shows that Park (2002)'s main results no longer holds if we consider a downstream market consisting of more than two but a nite number of rms.…”

“…However, none of these papers has investigated how factor market imperfections alter managerial incentives in downstream markets, which is the main purpose of our paper. Since our model encompasses those of Park (2002) and Claude (2018), we check the robustness of their results.…”