Bargaining Over Managerial Contracts: A Note

Abstract

The theory of strategic managerial delegation has recently been extended by incorporating bargaining over managerial contracts (van Witteloostuijn et.al 2007, etc). Assuming that bargaining involves only the incentive rates of managers, this line of research has shown that market outcomes (profits and social welfare) depend crucially on the intra-firm allocation of bargaining powers. In the current paper we revisit the bargaining framework assuming that negotiations involve all contractual terms (incentive rates and transfers). We show that contrary to the earlier results, the market equilibrium is independent of bargaining powers, the latter determining only the transfers. Hence the outcome of our model is identical to the outcome of the delegation model with no bargaining.