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

C. Manasakis, Evangelos Mitrokostas, E. Petrakis

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    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.
    Original languageEnglish
    Pages (from-to)531-543
    Number of pages13
    JournalManagerial and Decision Economics
    Volume31
    Issue number8
    DOIs
    Publication statusPublished - Dec 2010

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