Endogenous managerial compensation contracts in experimental quantity-setting duopolies

Iván Barreda-tarrazona, Nikolaos Georgantzís, Constantine Manasakis, Evangelos Mitrokostas, Emmanuel Petrakis

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    Abstract

    Given the ongoing debate on managerial compensation schemes, our paper offers empirical insights on the strategic choice of firms' owners over the terms of a managerial compensation contract, as a commitment device aiming at gaining competitive advantage in the product market. In a quantity setting duopoly we experimentally test whether firms' owners compensate their managers through contracts combining own profits either with revenues or with relative performance, and the resulting managerial behaviour in the product market. Prominent among our results is that firms' owners choose relative performance over profit revenue contracts more frequently. Further, firms' owners successfully induce a more aggressive behaviour by their managers in the market, by setting incentives which deviate from strict profit maximization.
    Original languageEnglish
    Pages (from-to)205-217
    JournalEconomic Modelling
    Volume54
    Early online date28 Jan 2016
    DOIs
    Publication statusPublished - 1 Apr 2016

    Keywords

    • Experimental economics
    • Oligopoly theory
    • Managerial delegation
    • Endogenous contracts

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