Managerial incentives as a strategic variable in duopolistic environment

Should One Sell Domestic Firms to Foreign Ones? A Tale of Delegation, Acquisition and Collusion

“…When owners are simultaneously choosing whether to delegate or not, delegation is the dominant strategy of the one-shot noncooperative game (see, inter alia, Vickers (1985), Basu (1987), Fershtman and Judd (1987), Sklivas (1987), Fershtman (1985), Katz (1986)). As this game is repeated in…nitely many times, there is scope for stable forms of collusion.…”

“…The incentive function in (3) is equivalent to assume that managers maximize a linear combination of pro…ts and revenues, pro…ts and costs, or sales and costs (d'Aspremont and Gerard-Varet (1980), Fershtman (1985), Fershtman and Judd (1987), Katz (1986), Sklivas (1987)). The special case = 0 implies that the manager maximizes the same objective function as the owner would, and that there is no di¤erence in the output levels produced by an entrepreneurial …rm and a managerial one.…”

“…In the one-shot non-cooperative game, hiring managers is a dominant strategy in that delegation makes the …rm more aggressive under Cournot competition and creates a credible commitment towards output expansion. In equilibrium output is larger and prices are lower as compared to the Cournot Nash equilibrium, thereby reducing pro…ts and increasing consumer surplus (Fershtman, 1985, Vickers, 1985. Considering a repeated Cournot oligopoly between two …rms, Lambertini and Trombetta (2002) show that delegation can make the cartel more unstable when owners collude in setting the incentives schemes, because it makes deviation from the cartel more appealing compared to a situation where …rms are strict pro…t-seeking agents.…”

Delegation, worker compensation, and strategic competition

“…In the industrial organization literature, strategic competition is widely analyzed, but the models either concentrate on interfirm competition between monolithic firms (see, e.g., Tirole 1988) or they combine intrafirm and interfirm interaction where principals of competing firms employ manager agents (see, e.g., Vickers 1985, Fershtman 1985, Fershtman and Judd 1987, 2006Sklivas 1987, Hermalin 1992, Cailland, Jullien and Picard 1995, Schmidt 1997, Jansen, van Lier and van Witteloostuijn 2007. These manager agents decide on quantities (or prices), but they are not involved in the production process itself and face no effort cost of producing.…”

Commitment in R&D tournaments via strategic delegation to overoptimistic managers

“…The classic literature on strategic delegation analyzes how contract design can create commitment for managers. In models of Cournot competition, Vickers (1985) shows that optimal contracts have elements of relative performance evaluation, inducing the agent to act more aggressively and Fershtman (1985) provides an example that firm profits increase if managerial incentive contracts condition not only on profits but also on sales. Fershtman and Judd (1987) extend this analysis to differentiated Bertrand competition and show that owners there also have an incentive to distort managerial incentives.…”