Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment

Abstract

In a differentiated Cournot duopoly, we examine the contracts that firms' owners use to compensate their managers and the resulting output levels, profits and social welfare. If products are either sufficiently differentiated or sufficiently close substitutes, owners use Relative Performance contracts. For intermediate levels of product substitutability, they use Market Share contracts. When owners do not commit over the types of contracts, each type is an owner's best response to his rival's choice. Product substitutability has differential effects on output levels and profits, depending on the configuration of contracts in the industry. Finally, managerial incentive contracts are welfare enhancing if they increase consumers' surplus. Copyright (C) 2010 John Wiley & Sons, Ltd.

Endogenous managerial compensation contracts in experimental quantity-setting duopolies

“…2) The frequency of Relative Performance contracts will be lower (higher) in the absence (presence) of owners' commitment over the contract type 6 For further details see Manasakis et al (2010). The intuition behind this result goes as follows: An RP contract makes a manager's behavior less susceptible to strategic manipulation by rival managers.…”

“…Eighteen owner-manager pairs, labeled as firms, were randomly formed 5 A key assumption in the strategic managerial delegation literature is that firms' owners commit over the types of contracts that they choose to compensate their managers. Yet, Manasakis et al (2010) find that when there is no such commitment, each type of contract is an owner's best response to the rival owner's contract choice, leading to multiplicity of equilibria.…”

Managerial Bonus Systems in a Differentiated Duopoly: A Comment

“…Moreover, contrary to Manasakis et al . (), all our conclusions are based on analytical proofs rather than on numerical calculations.…”

“…Manasakis et al . () build upon the framework of Jansen et al . (), but assume that the two competing firms produce differentiated products.…”

Endogenous Choice of Strategic Variables in an Asymmetric Duopoly with Respect to the Demand Functions that Firms Face

“…Furthermore, in a differentiated Cournot duopoly, Manasakis et al . () endogenously determined the incentive contracts among the sales delegation, the relative performance delegation, and the market share delegation that firms' owners use to compensate their managers and considered the resulting output levels, profits and social welfare in detail.…”