Location Choice and Contract Bargaining

Abstract

We study how managerial bargaining power affects outcomes and payoffs in a Hotelling‐type duopoly framework with restricted and unrestricted locations. We show that bargaining power only affects the distribution of the surplus between owners and managers but does not affect the locations, prices, managerial incentives, and consumer welfare. This is in stark contrast to van Witteloostuijn et al. (2007) and related contributions where bargaining power has real effects. We argue that the difference between our irrelevance result and their findings originates from the fact that their approach seems to be based on a behavioral assumption and not on microeconomic principles of owner–manager bargaining. Copyright © 2015 John Wiley & Sons, Ltd.

Strategic trade policy with bargaining over managerial contracts

“…As known,Eaton and Grossman (1986) have shown that the optimal choice for governments is a tax (instead of a subsidy) in the case of price (instead of quantity) competition. In such a case, the policy intervention is welfare superior (for producing countries) to free trade.11 For the sake of clarity, we recall here that the Brander and Spencer's result always holds true also under the preceding extensions to the managerial delegation surveyed in the Introduction and thus only in the present model with owner-manager bargaining the presence of managerial delegation may modify such results.12 For instance, this alternative view of managerial contracts has been recently investigated byKopel, Pezzino, and Ressi (2015) in a location model framework.13 The expressions for q(s i , s j ), π(s i , s j ), and SW(s i , s j ) are too long and omitted here for brevity. 14 The equilibrium outcomes under free trade are easily obtained by setting s i = s j = 0 in Equations A.7-A.13.…”

“…For instance, this alternative view of managerial contracts has been recently investigated by Kopel, Pezzino, and Ressi () in a location model framework.…”