Endogenous timing of managerial delegation contracts in a unionized duopoly

In a multiple‐stage duopoly game with strategic delegation and unionized labor market, this paper analyzes whether firms' owners decide managerial incentive contracts sequentially or simultaneously. When firms compete in quantities, firms' owners can choose incentive contracts simultaneously or sequentially, depending on the unions' relative bargaining power and the degree of product differentiation. Instead, when firms compete in prices, firms' owners set incentive contracts sequentially with substitute goods and simultaneously with complement goods.     

Endogenous timing in a mixed duopoly: price competition with managerial delegation

We introduce a managerial delegation contract into the mixed duopoly model and examine its influence on price setting in a mixed duopoly in the context of the endogenous‐timing problem. We obtain the result that owners of a public and a private firm prefer to delay the setting of the prices of their products as much as possible. Thus, in equilibrium, the firms choose their prices simultaneously in the latter stage of the game. This is in contrast to the findings of the entrepreneurial case, according to which firms choose prices simultaneously in the former stage. Copyright © 2009 John Wiley & Sons, Ltd.     

Accreditation in a differentiated duopoly

Accreditation is increasingly important worldwide; however, some industries have higher accreditation rates than others. We suggest a duopoly model to discuss how market characteristics affect the incentive for firms to seek accreditation. The discussion relates to the effects accreditation might have on the costs and demands in the markets, the degree of product differentiation (addressing both substitutable and complementary goods), type of competition (various Cournot and Bertrand games), and welfare for society. It follows that markets with high accreditation rates are either characterized by fierce competition (price competition in substitutable goods) or by a high degree of coordination (complementarity).     

Environmental taxes in a differentiated mixed duopoly

Beladi and Chao (2006) and Bárcena-Ruiz and Garzón (2006) considered the role of environmental policy on the decision whether to privatize a public firm in different market structures. This paper re-examines whether privatization improves (or deteriorates) the environment in a mixed duopolistic framework with differentiated product and pollution abatement. It is shown that, due to privatization, less attention is paid to pollution abatement by all the firms coupled with less environment taxes levied by the government in a differentiated duopoly, and the environment is more (less) damaged when the product is less (more) substitutable. When the product is highly substitutable, industry profits increase because this softens the intensity of the product market, but social welfare deteriorates accompanied with the path of privatization because the loss of consumer surplus and tax revenue exceeds the increases in profits, even if the environment is less damaged.     

Dynamic incentive contracts with termination threats

We consider a dynamic moral hazard model where the principal offers a series of short-run contracts. We study the optimal mix of two alternative instruments for incentive provision: a performance based wage (a “carrot”) and a termination threat (a “stick”). At any given point in time, these instruments are substitutes in the provision of incentives. We are particularly interested in the dynamic interaction of these two instruments. Both carrot and stick are used more intensively as the agent approaches the end of his finite life. The sharing of the surplus of the relationship plays a key role: a termination threat is included in the optimal contract if and only if the agent’s expected future gain from the relationship is sufficiently high, compared to the principal’s expected future gain. Also, a termination threat is more likely to be optimal if output depends more on “luck” than on effort, if the discount factor is high, or if the agent’s productivity is low. The model, provided that the optimal contract includes a termination threat, essentially provides an alternative explanation for upward-sloping wage profiles even in the absence of full-commitment.     

Endogenous spillovers in a non-tournament R&D duopoly under uncertainty

Including R&D risk, this paper considers the choices of R&D spillovers in a simple non-tournament cost-reducing R&D duopoly game with Bertrand competition. It turns out that the two firms never disclose any of their R&D information when considering their R&D non-cooperatively. However, if the firms decide their R&D cooperatively, we show, though they would always fully share their information when the risk of R&D is low, they would not disclose any of their R&D information when the market competition is fierce, the R&D risk is high and the R&D is efficient.     

Strategic trade policy with bargaining over managerial contracts

This paper re‐examines the well‐known activist regime's inefficiency (governments set export subsidies) in a sales–delegation game with owner–manager bargaining over contracts. Contrary to the received literature, this bargaining process may (a) induce governments to set a tax if products are not too substitute or complements and (b) lead to an efficient (inefficient) equilibrium provided that products are sufficiently differentiated (not too complements). Therefore, unilateral public intervention can be optimal: in case of rival governments' retaliation, under appropriate product competition degrees, welfares are larger than under free trade even for small managers' power. Thus, managerial delegation practices are crucial also for international trade issues.     

Bargaining over managerial contracts in delegation games: managerial power,contract disclosure and cartel behavior

Modern corporate governance codes include clauses requiring the disclosure of managerial compensation. Such codes have been installed to protect shareholders' interests. In this paper, we explore the impact of such disclosure on consumer welfare. We consider two‐stage delegation games in which owner‐shareholders negotiate about compensation with their managers in the game's first stage. At the end of the first stage, the managerial compensation contract outcomes of the bargaining process are publicly announced. In the second stage, Cournot competition evolves. We prove that sales delegation generates equilibria radically different from relative performance delegation. Using classical Cournot as the benchmark, contractual bargaining over sales compensation gives tougher product market competition—and hence higher consumer surplus. The opposite holds true for relative performance delegation. Then, cartel behavior is promoted, reducing consumer surplus. Copyright © 2007 John Wiley & Sons, Ltd.     

Transfer prices and incentive contracts in vertically-integrated divisionalized companies

This paper studies a divisionalized firm with sequential transfers in which central management wants to motivate two division managers who receive predecision information. Central management can only contract on the observables price, cost and quantity. Starting with the optimal compensation schemes as a benchmark, the paper considers the question whether using transfer prices to substitute for price and cost, respectively, can replicate the optimal solution or not. This is to say, whether using an aggregate measure comes at a loss. The results are dependent on the design constraints (i) single or ‘dual’ transfer prices and (ii) simultaneous design of the reward functions or exogenously given reward functions. Basically, only in the case that central management is restricted to given reward functions, and wants to use the same single transfer price for both divisions, there is a loss relative to the benchmark solution. In the other cases, generally, there is enough latitude to design the available functions to mimic the benchmark. The paper goes on to discuss special cases. First, it finds conditions when purely cost-based transfer prices are optimal, and second, it derives explicit solutions for given linear compensation schemes over divisional book profits.     

Quality-improving R&D and merger policy in a differentiated duopoly: Cournot and Bertrand equilibria

We combine a model of product research and development (R&D) and technological spillover with the concept of technological distance and examine horizontal mergers in a duopolistic market with R&D. The results are fourfold. First, a merger can better encourage R&D investment than the competition case. Second, with a small degree of product differentiation (PD), the merger criterion under the Cournot duopoly is stricter than that of the Bertrand case. By contrast, with a moderate or large degree of PD, the opposite is true. Third, with a small technological distance, a merger should be allowable. Finally, with a small degree of PD and moderate technological distance, a merger should be allowable.     

Implementation of multi-agent incentive contracts with the principal's renegotiation offer

The purpose of this paper is to explore a mechanism for supporting desired equilibrium actions in a one-principal, multi-agent model when the principal makes a renegotiation offer. We show that there exists a mechanism in which the principal's most preferred mixed strategy is always supported. Received: 30 May 1997 / Accepted: 10 October 1998     

The strategic use of managerial incentives in a non‐profit firm mixed duopoly

A mixed duopoly setting is examined where a private non‐profit firm (NPO) competes with a private profit‐maximizer. The NPO's stakeholders select a contract for their managers. A novel NPO objective function is utilized which takes into account all the likely returns to the NPO's stakeholders (NPO profits and the surplus accruing to the NPO stakeholders) in such a commercial setting. In sub‐game perfect equilibria, it is shown that the NPO's managers generally will not be given the NPO's true objective to optimize. It is also shown that aggregate social welfare may increase or decrease due to this managerial contracting behavior or the use of NPO membership fees. Copyright © 2007 John Wiley & Sons, Ltd.     

Strategic pricing of differentiated consumer durables in a dynamic duopoly: A numerical analysis

Under different modes of competitive pricing behavior, profit-maximizing price trajectories are derived for durable products in a dynamic duopoly. Open-loop co-operative and non-cooperative pricing behavior is analyzed within a comprehensive model where sales of differentiated products are described by interlocked diffusion processes with realistic demand characteristics. Because of analytic complexity, the optimal trajectories implied by the control and differential-game problems are derived numerically across an extensive set of plausible market scenarios. Manipulation of initial market conditions enables derivation of optimal competitive pricing as a function of timing of entry.     

Equity‐based incentive contracts and behavior: Experimental evidence

Equity ‐ based incentive contracts provide managers with dual incentives, motivating both effort and fraud. We report the results from an experiment in which manager subjects make effort and fraud decisions that affect a firm's value. The main treatment variable is the incentive contract, which can be of either the simple equity or stock option type. We find that both effort and fraud are increasing in a manager's share of equity and decreasing in the strike price of an option. Interestingly, the stock option contract induces relatively more fraud than the simple equity contract, even though the two induce the same effort.     

Optimal self-financing microfinance contracts when borrowers have risk aversion and limited commitment

This paper examines optimal lending contracts between a single not-for-profit lender and a continuum of risk-averse borrowers, where the lending relationships are continually created and destroyed.  The lender self-finances its costs via income from loans, while borrowers can walk away from the current relationship in any period and search for a new relationship.  We characterize the optimal allocation by formulating the lender’s problem of maximizing social welfare and by resorting to a variational argument that takes into account the limited commitment problem and the endogenous outside option values of the borrowers.  In the benchmark case of the Benthamite social welfare function, we find that the optimal stationary allocation exhibits novel consumption dynamics: Borrower consumption begins at a relatively low level, converges toward a particular level when the participation constraint is slack, and jumps up when the participation constraint binds.  We then explore the role of limited commitment in generating such consumption dynamics and discuss the associated repayment profile.     

Public spending and optimal taxes without commitment

We consider a representative agent, infinite-horizon economy where production requires private and public capital. The supply of public capital is financed through distortionary taxation. The optimal (second best) tax policy of a benevolent government is time inconsistent. We therefore introduce explicitly the constraint that at no point in time the revision of the original tax plan is desirable. We completely characterize the (third best) tax plan that satisfies this constraint, and estimate the difference in tax rate between the second and third best policy for a wide range of parameters. For some of these the difference between the second and third best tax rates is large, and so are the associated rates of economic growth.     

A differential game in a duopoly with instantaneous incentives

In this paper, we study a differential game in which two competing firms exploit a public renewable resource that is relevant from a landscape point of view. We consider a policy maker that provides an instantaneous incentive to the firms in order to prevent the resource exhaustion during the whole extraction period, which coincides with the harvesting license period. We compute an open-loop Nash equilibrium of the differential game, showing that it coincides with a linear feedback Nash equilibrium. Finally, we compute the value of the incentive that leads to the maximization of social welfare considering the incentive both as a pure transfer and as a cost.     

Ownership structure and golden parachutes: Evidence of credible commitment or incentive alignment?

Using a sample of S & P 500 firms, we find that golden parachutes are associated with concentrated external ownership, less concentrated internal ownership, and non-Delaware incorporation. We find little support that concentrated external owners use golden parachutes as credible commitment devices. The general multivariate results support the incentive alignment hypothesis, and reaffirm the view that golden parachutes are a mechanism used to align managerial and shareholder interests when there is a separation between ownership and control. (JEL G32)     

Performance measure properties and efficacy of incentive contracts: perceptions of U. S. employees

This paper examines how employees perceive the impact of performance measure properties (noise and distortion) on the efficacy of incentive contracts in the United States. It surveys 98 employees at middle and lower levels of U. S. firms across different industries. The survey results show that employees perceive noise and distortion in performance measures to significantly influence the overall efficacy of incentive plans. Specifically, employees perceive that incentive plans with less noisy or distorted measures attract better employees to their firms. However, employees do not perceive lower noise or distortion in performance measures to motivate more effort in their work after controlling for the selection effect of incentive plans. These results illustrate the importance of performance measure properties in the U. S. incentive contracts and provide evidence regarding cross-national differences in management practices.     

Performance compensation contracts and CEOs’ incentive to shift risk to debtholders: An empirical analysis

The paper investigates the relationships among CEO incentive contracts, manager ownership, charter value, and bank risk taking. We analyze whether the presence and magnitude of incentive contracts induce CEOs of financially distressed firms and firms with high manager ownership to take unprofitable risks that shift wealth from debtholders to equity holders. Our sample focuses on banks that had both the incentive and opportunity to shift risks, and compares them with those that did not. We compare weak and strong banks in periods when the banks’ principal creditor, the FDIC, was a lenient and then a stringent monitor. The evidence is consistent with bonus compensation inducing CEOs of financially weak firms to shift risk to debtholders only if they do not have large insider ownership. The evidence is also consistent with these contracts rewarding CEOs for their effort to manage unforeseeable risk albeit not their ability. Low charter value banks with high managerial ownership took profitable risk during the lenient regulatory period.