Strategic delegation under quality competition |
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Authors: | Koji Ishibashi |
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Institution: | (1) Present address: Department of Economics, Keio University, 2-15-45 Mita, Minato-ku, 108-8345 Tokyo, Japan |
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Abstract: | This paper examines strategic manipulations of incentive contracts in a model where firms compete in quality as well as in
price. Compensation schemes for managers are based on a linear combination of profits and sales. For a given level of quality,
a firm desires to reduce the manager's compensation when product sales increase; this serves as the firm's commitment to raise
prices. Nevertheless, in general, a manager has a stronger incentive to produce goods of higher quality if he is compensated
according to sales. Therefore, a compensation scheme that penalizes a manager when sales increase may result in products that
are inferior to those of its rival. We show that, depending on the nature of quality, a positive weight on sales may be desirable
when firms compete in quality and price. Welfare implications are also explored. |
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Keywords: | delegation price competition quality competition incentive scheme |
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