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Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment
Author(s) -
Manasakis Constantine,
Mitrokostas Evangelos,
Petrakis Emmanuel
Publication year - 2010
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1507
Subject(s) - duopoly , commit , cournot competition , incentive , microeconomics , product differentiation , economic surplus , economics , product (mathematics) , welfare , social welfare , bertrand competition , business , industrial organization , oligopoly , market economy , geometry , mathematics , database , computer science , political science , law
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 © 2010 John Wiley & Sons, Ltd.