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Competition and Agency Cost

Author

Listed:
  • Can Erutku

    (Glendon College, York University)

Abstract

We look at the effect of competition on the level of cost reducing effort made by an agent in an industry where competition is in quantity with homogeneous products. We find that the principal prefers to keep all the profit rather than sharing it with the agent, who ends up exerting no effort regardless of the number of firms in the industry (provided it is greater than two). This suggests that profit sharing contracts might not be the appropriate mechanism to provide incentives in an industry characterized by principal-agent relationships and where firms compete in quantity.

Suggested Citation

  • Can Erutku, 2016. "Competition and Agency Cost," Economics Bulletin, AccessEcon, vol. 36(2), pages 634-639.
    • Handle: RePEc:ebl:ecbull:eb-16-00084
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2016/Volume36/EB-16-V36-I2-P63.pdf
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    References listed on IDEAS

    as
    1. Stefan Beiner & Markus M. Schmid & Gabrielle Wanzenried, 2011. "Product Market Competition, Managerial Incentives and Firm Valuation," European Financial Management, European Financial Management Association, vol. 17(2), pages 331-366, March.
    2. Jen Baggs & Jean‐Etienne De Bettignies, 2007. "Product Market Competition And Agency Costs," Journal of Industrial Economics, Wiley Blackwell, vol. 55(2), pages 289-323, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Principal-Agent; Profit Sharing; Quantity Competition; Effort.;
    All these keywords.

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • D2 - Microeconomics - - Production and Organizations

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