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Discussion Paper Details

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Title: Managerial Incentives and Product Market Competition

Author(s): Klaus M. Schmidt

Publication Date: April 1996

Keyword(s): Competition, Managerial Incentives and Moral Hazard

Programme Area(s): Industrial Organization

Abstract: The paper shows that an increase in competition has two effects on managerial incentives: it increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the firm?s profits, which may make it less attractive to induce high effort. Thus, the total effect is ambiguous. The paper identifies natural circumstances where increased competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple example demonstrates that ? starting from a monopoly ? managerial effort may increase as additional competitors enter the market, but will eventually decrease when competition becomes too intense.

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Bibliographic Reference

Schmidt, K. 1996. 'Managerial Incentives and Product Market Competition'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1382