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.