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Managerial Incentives and Product Market Competition

Managerial Incentives and Product Market Competition 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.I identify natural circumstances where increasing 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economic Studies Oxford University Press

Managerial Incentives and Product Market Competition

The Review of Economic Studies , Volume 64 (2) – Apr 1, 1997

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References (24)

Publisher
Oxford University Press
Copyright
© Published by Oxford University Press.
Subject
Articles
ISSN
0034-6527
eISSN
1467-937X
DOI
10.2307/2971709
Publisher site
See Article on Publisher Site

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.I identify natural circumstances where increasing 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.

Journal

The Review of Economic StudiesOxford University Press

Published: Apr 1, 1997

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