Discussion Paper Details

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Title: Managerial Incentives for Mergers

Author(s): Ramon Faulí-Oller and Massimo Motta

Publication Date: February 1996

Keyword(s): Incentives, Merger Profitability and Take-overs

Programme Area(s): Industrial Organization

Abstract: We study managerial incentives in a model where managers take not only product market but also take-over decisions. We show that the optimal contract includes an incentive to increase the firm's sales, under both quantity and price competition. This result contrasts with the previous literature, and hinges on the fact that with a more aggressive manager rival firms earn lower profits and are willing to sell out at a lower price. As a side-effect of such a contract, however, the manager might take more rivals over than it would be profitable.

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Bibliographic Reference

Faulí-Oller, R and Motta, M. 1996. 'Managerial Incentives for Mergers'. London, Centre for Economic Policy Research.