Should managerial delegation contracts be made before or after union wage setting? A game‐theoretic analysis

This paper analyzes a multiple‐stage game in which, at the final stage, two (managerial) firms compete over quantities in the product market. Prior to this stage, firm‐specific unions set the workers' wages, while the owners of both firms hire managers and provide them with incentive contracts. Owners can freely decide to arrange the managerial contract before or after the (non‐managerial) wage determination stage. Hence, the endogenous choice of the incentive contract stage is derived. The possibility of multiple equilibria arises, where both owners choose managerial contracts before or after unions' wage setting, crucially depending on unions' preferences. Such results also prove to be true for a remarkable degree of asymmetry in preferences over wages vis‐à‐vis employment across unions.     

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

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.     

Aggressiveness of Managers in the Market with Network Effects: The Case of Biased Managers as Strategic Commitment

This paper analyzes a model wherein firms' owners hire biased managers in a differentiated goods duopoly with network effects. We show that whether firms hire an aggressive manager or not depends on both the degree of product differentiation and the strength of network effects in price competition whereas it does not depend on the degree of product differentiation or the strength of network effects in quantity competition. Thus, the attitudes of firms' managers depend on the type of competition and the relative magnitude of the strength of network effects to the degree of product differentiation. Copyright © 2015 John Wiley & Sons, Ltd.     

Market structure,common ownership,and coordinated manager compensation

We study oligopolistic competition in product markets where the firms' quantity decisions are delegated to managers. Some firms are commonly owned by shareholders such as index funds, whereas the other firms are owned by independent shareholders. Under such an asymmetric ownership structure, the common owners have an incentive to coordinate when designing the manager compensation schemes. This implicit collusion induces a less aggressive output behavior by the coordinated firms and a more aggressive behavior by the noncoordinated firms. The profits of the noncoordinated firms are increasing in the number of coordinated firms. The profits of the coordinated firms exceed the profits without coordination if at least 80% of the firms are commonly owned.     

Vertical externality and strategic delegation

This paper examines the effects of vertical externality generated by the upstream monopoly on the incentives that owners of competing downstream firms give their managers. It is shown that the introduction of the upstream monopoly may have significant effects on the incentive schemes for the downstream firms' managers. In particular, it is shown that in equilibrium, each owner obtains the simple Nash equilibrium outcome regardless of the mode of competition (quantity or price) in the downstream market. Copyright © 2002 John Wiley & Sons, Ltd.     

Strategic Corporate Social Responsibility Activities and Corporate Governance in Imperfectly Competitive Markets

We investigate the incentives of firms' owners to commit voluntarily to corporate social responsibility (CSR) activities in an oligopolistic market. The socially responsible attributes attached to products are considered as credence goods, with consumers forming expectations about their existence and level. We show that hiring an ‘individually’ socially responsible CEO and delegating to him the CSR effort and market decisions acts as a commitment device for the firm's owners and credibly signals to consumers that the firm will undertake the ‘missioned’ CSR activities. We also find that CSR activities are welfare enhancing for consumers and firms and thus, they should be encouraged. Copyright © 2013 John Wiley & Sons, Ltd.     

Price versus quantity in a duopoly with network externalities under active and passive expectations

This study examines the endogenous choice of strategic contracts in a duopoly composed of firms that produce goods with network externalities with some sort of compatibility. We adopt two types of expectations—active and passive—as consumers' expectations for each firm's equilibrium market share. In addition, we take into account the managerial case and entrepreneurial case with and without separation between ownership and management, as firms' internal structures. We derive the properties in the Cournot competition and the Bertrand competition as the equilibrium market structures under both passive and active expectations under imperfectly compatibility of networks.     

When Does Aftermarket Monopolization Soften Foremarket Competition?

This paper investigates firms' abilities to tacitly collude when they each monopolize a proprietary aftermarket. When firms' aftermarkets are completely isolated from foremarket competition, they cannot tacitly collude more easily than single‐product firms. However, when their aftermarket power is contested by foremarket competition as equipment owners view new equipment as a substitute for their incumbent firm's aftermarket product, profitable tacit collusion is sustainable among a larger number of firms. Conditions under which introduction of aftermarket competition hinders firms' ability to tacitly collude are characterized.     

Competing for Consumers with Self‐Control Problems

I examine strategic implications of competing for consumers with self‐control problems. For investment goods, like health clubs, I find that the equilibrium sign‐up (lump‐sum) fees decrease when competition intensifies, similarly to prices in standard oligopoly models. However, the equilibrium attendance (per‐unit) price increases due to firms' deteriorated ability to take advantage of consumers' self‐control problems. Moreover, firms earn less profit due to consumers' self‐control problems—the firms have a unilateral incentive to charge per‐unit fees lower than the marginal cost; however, they cannot make up the lost margins by increasing the lump‐sum fee, due to competition. I also show that for plausible parameter regions the market adjusts to consumers' self‐control problem in such a way that firms play the standard equilibrium strategies that they would have engaged in with fully rational consumers, with identical market outcomes. Most of the results are qualitatively the same for leisure goods (for example, credit cards); however, some results are reversed: the per‐unit fees are higher than marginal cost and decrease as competition intensifies.     

The impact of group incentives on performance of small firms: Hausman–Taylor estimates

This paper investigates the impact of group incentives on firms' performance. It shows that group incentive raises firms' performance. This result empirically validates the implication of the theoretical literature that performance‐related pay can potentially improve firms' performance, in the context of a developing country, and indicates the importance of group incentives in small firms. It also shows that partnership firms perform better than private limited companies and labour unions have a negative impact on firms' performance. It employs the Hausman–Taylor random effects estimator in order to isolate the effects of time‐invariant covariates and also to tackle potential endogeneity problem. Copyright © 2010 John Wiley & Sons, Ltd.     

Agency,corporate control and accounting methods–the lifo-fifo choice

The study examines the effect of the firm's ownership structure on its management's choice of LIFO or FIFO inventory valuation methods. Managers of widely held firms are found to select the accounting method that furthers their own interests, thus causing the firms' owners to bear agency costs that appear to be substantial.     

Does it pay to venture abroad? Exporting behavior and the performance of firms in Indian industry

Using contemporary data for a firm-level sample of over 600 Indian firms, this paper investigates the impact that an export-orientation has on the profitability of the firms studied. The results, based on a two-stage least squares method, establish a positive and significant relationship between firms' levels of exports and profitability. For firms from developing and transition economies like India it does pay to venture abroad, and the ability to sell goods overseas has a significant impact on firms' economic performance. © 1998 John Wiley & Sons, Ltd.     

The impact of government financial support on the performance of new firms: the role of competitive advantage as an intermediate outcome

This research examines the influence of government financial support on new firms' performance. Extant empirical research on the topic has found mixed results, which warrants an exploration of the theoretical basis for the impact of support policies on new firms' performance. Grounding the theoretical model in the resource-based view and institutional theories, this study contends that performance outcomes – e.g. revenues or profits – should not be the first outcomes of public policies to be examined. Instead, competitive advantage formation is suggested as a link between support policies and new firms' performance. Using new firms from the USA, we examine the impact of government financial support measures – government loans, guarantees and government equity – on firms' overall competitive advantage and more specific types of competitive advantage based on innovation, licensing-in, marketing and human capital. Controlling for family funding, bank financing, equity of business angels and venture capitalists, industry, size as well as entrepreneur's characteristics, the results reveal that government guarantees and government equity have a direct effect on new firms' competitive advantage and only an indirect impact on performance. Our results suggest to policy-makers to focus on helping new firms build the necessary capabilities to compete successfully in the marketplace.     

Competition with Aftermarket Power When Consumers Are Heterogeneous

We study a model of competitive foremarkets and partly monopolized aftermarkets. We show that high aftermarket power prompts firms to engage in inefficiently aggressive below‐cost pricing in the foremarket. This inefficiency is driven by the presence of consumers with valuations below marginal cost. While for intermediate aftermarket power their presence leads to a competition‐softening effect, for high aftermarket power firms attract increasing numbers of unprofitable consumers by aggressively pricing below cost. For high aftermarket power, firms' equilibrium profits can therefore be decreasing in aftermarket power but are always higher than for low aftermarket power. If firms engage in price discrimination by bundling the foremarket and aftermarket goods or by reducing their aftermarket power, they avoid selling to unprofitable consumers but also reduce the competition‐softening effect. This decreases firms' equilibrium profits but increases consumer and social welfare.     

The equivalence of supporting software delegation and sales delegation

This paper considers a duopoly market with horizontally differentiated system goods to examine system owners' behaviors under supporting software delegation, in which owners of system firms use varieties of supporting software, coupled with profit, to evaluate their managers' performance. Supporting software delegation seems to induce managers to act more aggressively in price competition than sales delegation does; however, we prove that if two systems are compatible and the varieties of supporting software are determined by hardware owners' overall expenditure amount on software, then supporting software delegation is equivalent to sales delegation. Owners of system firms induce their managers to act less aggressively in hardware price competition by offering contracts with a negative weight on varieties of supporting software under supporting software delegation. We find that stronger network externalities do not reverse system owners' contracting behaviors under supporting software delegation. Finally, it is worth mentioning that hardware technologies are static in this paper. In other words, dynamic changes such as hardware evolution are not considered in our analysis.     

Labor's liquidity service and firing costs

This paper studies the specific effect that firing costs can have on firms facing liquidity constraints. When firing costs are zero and a time gap exists between production and its associated revenues, firing allows firms to hold on to their liquid assets by saving on wages, and thus, allows firms to cope better with liquidity shocks when external financing is too costly or unavailable. I refer to this feature as labor's liquidity service. Higher firing costs reduces the value of labor's liquidity service, and thus, increases firms' incentive for hoarding liquidity and reduces firms' demand for production inputs. In addition to this negative effect at the creation margin of production, firing costs have a relatively higher positive effect on the destruction margin of production of financially restricted firms. This paper presents a model that develops these ideas and shows that the presence of firing costs has a stronger negative effect on the output of firms facing liquidity constraints. Regression analysis, based on country-industry panel data sets, provides empirical evidence consistent with the liquidity service effect of firing costs. I find a relatively stronger negative effect of firing costs on the output of industries with higher liquidity requirements and a relatively stronger negative effect of firing costs on the output of small, and more likely financially constrained, firms.     

Teaching an old dog a new trick: Reserve price and unverifiable quality in repeated procurement

This paper shows that, in a repeated competitive procurement, a buyer can use the reserve price in a low-price auction as a “public”—hence nondiscriminatory—incentive device to elicit unverifiable quality. We study a model with many firms and one buyer, who is imperfectly informed on the firms' costs. When firms are ex ante identical, the provision of quality is sustained by a sufficiently high reserve price to reward firms for the quality provision and by the threat of setting a low reserve price forever, if quality is not delivered. The buyer can elicit the desired level of unverifiable quality provided her baseline valuation of the project is not too high and the net benefit from unverifiable quality is not too low. These results are robust to firms' heterogeneity in their time preferences when the punishment for a deviation is finite but sufficiently long.     

The selection of contracts in supply chains: An empirical analysis

This paper seeks to empirically identify the key drivers for firms in selecting a contract in a supply chain by investigating their performance, supply chain orientation, and supply chain integration. A conceptual model is drawn up based on the existing literature in supply chain coordination contracts, performance, supply chain orientation, and supply chain integration and tested on a large sample of European firms. Multiple and multinomial logistic regression models allow for estimating the relationships between these variables. Our results demonstrate that the selection of contracts and the probability of their adoption depend on several combinations of firms' performance, supply chain orientation, and integration. Overall, the research provides an empirical contribution to the literature on coordination with contracts, which turns out to be mainly game theory based.     

Location decisions and welfare under spatial price discrimination

The welfare effects of regulation are of crucial importance to policy makers. To this end, we present a model of n firms with differentiated costs competing in a linear market within the framework of spatial price discrimination. We prove that the Nash equilibrium locations of firms are always socially optimal irrespective of the number of competitors, the distribution of consumers, firms' cost heterogeneity, the level of privatization, and the number and/or the varieties of the produced goods. We also provide an algorithm on how to find the unique Nash equilibrium in the case of uniformly distributed consumers.     

R&D in a strategic delegation game

This paper studies how a separation of ownership and management affects firms' R&D and production decisions in Cournot quantity competition. It is found that when R&D spillovers are small, owners strategically direct their managers away from profit maximization towards sales. Consequently, managerial firms invest more in R&D and have higher output and lower prices compared to their entrepreneurial counterparts. On the other hand, when spillovers are large, owners ‘penalize’ managers for sales. In this case, managerial firms have lower R&D, lower output and higher prices. Nonetheless, managerial firms have lower profits than their entrepreneurial counterparts regardless of spillovers. This paper also examines the welfare effects of a separation of ownership and management. It is found that in terms of first-best social welfare, managerial firms are more (less) efficient than their entrepreneurial counterparts with low (high) spillovers. However, in terms of second-best social welfare, managerial firms are less efficient with all spillovers. © 1997 John Wiley & Sons, Ltd.