DP1325 Managerial Incentives for Mergers

Author(s): Ramon Faulí-Oller, Massimo Motta
Publication Date: February 1996
Keyword(s): Incentives, Merger Profitability, Take-overs
JEL(s): G34, L12, L2
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1325

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.