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Competition And The Strategic Choice Of Managerial Incentives: The Relative Performance Case

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  • Alessandra Chirco
  • Marcella Scrimitore
  • Caterina Colombo

Abstract

In this paper we study the role of market competitiveness in a strategic delegation game in which owners delegate output decisions to managers interested in the firm's relative performance. In particular we study how the optimal delegation scheme - i.e. the distortion from pure profit maximization - is affected by market concentration and the elasticity of market demand. We show that these two indexes of market competitiveness do not alter managerial incentives in the same way: while the optimal degree of delegation decreases as the market becomes less concentrated, it increases as demand becomes more elastic.
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Suggested Citation

  • Alessandra Chirco & Marcella Scrimitore & Caterina Colombo, 2011. "Competition And The Strategic Choice Of Managerial Incentives: The Relative Performance Case," Metroeconomica, Wiley Blackwell, vol. 62(4), pages 533-547, November.
    • Handle: RePEc:bla:metroe:v:62:y:2011:i:4:p:533-547
    DOI: j.1467-999X.2011.04124.x
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    1. Schaffer, Mark E., 1989. "Are profit-maximisers the best survivors? : A Darwinian model of economic natural selection," Journal of Economic Behavior & Organization, Elsevier, vol. 12(1), pages 29-45, August.
    2. Caterina Colombo & Alessandra Chirco & Marcella Scrimitore, 2009. "Strategic delegation and market competitiveness," Economics Bulletin, AccessEcon, vol. 29(3), pages 1708-1716.
    3. Fumas, Vicente Salas, 1992. "Relative performance evaluation of management : The effects on industrial competition and risk sharing," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 473-489, September.
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    5. Jansen, Thijs & van Lier, Arie & van Witteloostuijn, Arjen, 2007. "A note on strategic delegation: The market share case," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 531-539, June.
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    8. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    9. Miller, Nolan H & Pazgal, Amit I, 2001. "The Equivalence of Price and Quantity Competition with Delegation," RAND Journal of Economics, The RAND Corporation, vol. 32(2), pages 284-301, Summer.
    10. Nolan Miller & Amit Pazgal, 2002. "Relative performance as a strategic commitment mechanism," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(2), pages 51-68.
    11. Palomino, Frederic, 2005. "Relative performance objectives in financial markets," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 351-375, July.
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    Cited by:

    1. Jumpei Hamamura, 2022. "Weight assigned to a rival's profit by an advantaged firm in relative performance evaluation with Cournot–Bertrand competition," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(7), pages 2838-2844, October.
    2. Stadler Manfred & Unsorg Maximiliane, 2022. "Manager Delegation, Owner Coordination and Firms’ Investment in Automation," Review of Economics, De Gruyter, vol. 73(2), pages 159-182, August.
    3. Jumpei Hamamura, 2021. "What level do disadvantaged firms weight rivals' profits in relative performance evaluations under quantity competition?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(2), pages 493-501, March.
    4. Jumpei Hamamura & Vinay Ramani, 2023. "Social performance versus relative performance evaluation, asymmetric costs, and quantity competition under managerial delegation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(3), pages 1706-1719, April.
    5. Werner Neus & Manfred Stadler, 2018. "Common holdings and strategic manager compensation: The case of an asymmetric triopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 39(7), pages 814-820, October.
    6. Stadler, Manfred & Neus, Werner, 2018. "Cross Holdings and Strategic Manager Compensation. The Case of an Asymmetric Triopoly," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181534, Verein für Socialpolitik / German Economic Association.
    7. Fanti, Luciano & Gori, Luca & Sodini, Mauro, 2015. "Nonlinear dynamics in a Cournot duopoly with isoelastic demand," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 108(C), pages 129-143.
    8. Leonard F. S. Wang, 2020. "Relative Performance Versus Market Share Delegation in a Vertically Related Market," Arthaniti: Journal of Economic Theory and Practice, , vol. 19(1), pages 16-27, June.
    9. Ya-Chin Wang, 2013. "Optimal R&D Policy and Managerial Delegation Under Vertically Differentiated Duopoly," South African Journal of Economics, Economic Society of South Africa, vol. 81(4), pages 605-624, December.

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    More about this item

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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