Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment
Article first published online: 9 APR 2010
Copyright © 2010 John Wiley & Sons, Ltd.
Managerial and Decision Economics
Volume 31, Issue 8, pages 531–543, December 2010
How to Cite
Manasakis, C., Mitrokostas, E. and Petrakis, E. (2010), Endogenous managerial incentive contracts in a differentiated duopoly, with and without commitment. Manage. Decis. Econ., 31: 531–543. doi: 10.1002/mde.1507
- Issue published online: 9 APR 2010
- Article first published online: 9 APR 2010
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.