In recent years many theoretical works have examined which type of contract the owner of a firm should offer to the firm's managers to induce them to maximise profits. One strand of this literature has studied this problem in the context of oligopolistic industries and has showed that a contract with managerial incentives can make the manager more aggressive in the market. This increases the firm's market share to the detriment of rivals, which in turn increases the owner's profit.

According to Research Affiliates Ramon Faulí-Oller and Massimo Motta in Discussion Paper No. 1325, the problem with this result is that it depends crucially on a technical assumption about the mode of competition in the industry. If, for instance, managers competed in the marketplace by choosing product prices, rather than quantities, the owner should never offer the firm's manager a contract that includes size incentives. Instead incentives should be less aggressive, to soften competition in the market and reach a more collusive outcome. The paper studies managerial incentives in a model where managers take not only product market but also take-over decisions. It is shown 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.