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COMPETITION AND THE STRATEGIC CHOICE OF MANAGERIAL INCENTIVES: THE RELATIVE PERFORMANCE CASE
Author(s) -
Chirco Alessandra,
Scrimitore Marcella,
Colombo Caterina
Publication year - 2011
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/j.1467-999x.2011.04124.x
Subject(s) - delegate , delegation , microeconomics , economics , incentive , profit (economics) , competition (biology) , welfare , industrial organization , price elasticity of demand , monopoly , market structure , market economy , ecology , biology , management , computer science , programming language
We investigate how market competition affects the incentive to adopt a non‐profit‐maximizing behaviour. The analysis is developed in a strategic delegation framework in which owners delegate output decisions to managers interested in firm's relative performance. We study how the optimal delegation scheme is affected by market concentration and the elasticity of market demand. We prove that the distortion from a profit‐maximizing rule decreases as market becomes less concentrated, while it increases as demand becomes more elastic. Finally, we discuss the impact of market competitiveness on the welfare‐enhancing ability of delegation contracts.