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The strategic choice of
managerial incentives |
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Steven
D. Sklivas |
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Rand Journal of Economics |
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Economists have long debated the objective
function of large corporations. Some have suggested that large firms are more
concerned with maximizing revenues or market share rather than profits. The
complexity of managerial decision processes and the separation of ownership and
management have been stressed as reasons for the deviation from profit maximization.
This paper examine the implications of the separation of ownership from
management for an oligopoly competing in prices or quantities, as in the
Bertrand or Cournot models.
This paper considers a two-stage, owner-manager game. In the first
stage owners simultaneously choose their managers¡¦ incentives. In the second
stage each manager choose the firm¡¦s price or quantity. Owner receive the
resulting profits, and each manager is rewarded according to the incentives
chosen by his owner. Since an owner¡¦s profits are determined by the actions
of all managers, his optimal choice of managerial incentives takes into
account their effect on rival managers¡¦ actions as well as on those of his
own manager. In addition, an owner¡¦s optimal choice of managerial incentives
will depend on rival owners¡¦ choices. This introduces a strategic element
into his decision.
This paper shows that when managers compete in quantities, the result
ore closely resembles competition than Cournot
behavior; conversely, when they compete in prices, the result more closely resembles
collusion than Bertrand behavior. |
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