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L ong ‐T erm or S hort ‐T erm M anagerial I ncentive C ontracts

L ong ‐T erm or S hort ‐T erm M anagerial I ncentive C ontracts This paper deals with the strategic role of the temporal dimension of contracts in a duopoly market. Is it better for a firm to sign long‐term incentive contracts with managers or short‐term contracts? For the linear case, with strategic substitutes (complements) in the product market, the incentive variables are also strategic substitutes (complements). It is shown that a long‐term contract makes a firm a leader in incentives, while a short‐term contract makes it a follower. We find that, under Bertrand competition, in equilibrium one firm signs a long‐term contract and the other firm short‐term incentive contracts; however, under Cournot competition, the dominant strategy is to sign long‐term incentive contracts. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economics & Management Strategy Wiley

L ong ‐T erm or S hort ‐T erm M anagerial I ncentive C ontracts

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References (33)

Publisher
Wiley
Copyright
Copyright © 1996 Wiley Subscription Services, Inc., A Wiley Company
ISSN
1058-6407
eISSN
1530-9134
DOI
10.1111/j.1430-9134.1996.00343.x
Publisher site
See Article on Publisher Site

Abstract

This paper deals with the strategic role of the temporal dimension of contracts in a duopoly market. Is it better for a firm to sign long‐term incentive contracts with managers or short‐term contracts? For the linear case, with strategic substitutes (complements) in the product market, the incentive variables are also strategic substitutes (complements). It is shown that a long‐term contract makes a firm a leader in incentives, while a short‐term contract makes it a follower. We find that, under Bertrand competition, in equilibrium one firm signs a long‐term contract and the other firm short‐term incentive contracts; however, under Cournot competition, the dominant strategy is to sign long‐term incentive contracts.

Journal

Journal of Economics & Management Strategy – Wiley

Published: Sep 1, 1996

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