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Investment Choice with Managerial Incentive Schemes

Author

Listed:
  • Shubhro Sarkar

    (Indira Gandhi Institute of Development Research, India)

  • Suchismita Tarafdar

    (Department of Economics, Shiv Nadar University, India)

Abstract

In this paper, we show that firms might get an additional strategic benefit from using marginal-cost-reducing investments in conjunction with strategic delegation. While both these instruments allow firms to “aggressively†participate in product market competition, we show that they act as substitutes or complements depending on whether they are chosen simultaneously or sequentially. Given that the use of such instruments is inseparably linked with a Prisoner’s Dilemma kind of situation, our analysis shows a way to mitigate at least to some extent such effects, through their simultaneous use. We find that the unique Nash equilibrium of the game with commitment comprises both players choosing the instruments simultaneously. In case the instruments are chosen without commitment, an asymmetric equilibrium is shown to exist in addition to the simultaneous protocol, yielding unequal payoffs.

Suggested Citation

  • Shubhro Sarkar & Suchismita Tarafdar, 2021. "Investment Choice with Managerial Incentive Schemes," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 23(02), pages 1-34, June.
    • Handle: RePEc:wsi:igtrxx:v:23:y:2021:i:02:n:s0219198920500164
    DOI: 10.1142/S0219198920500164
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    Citations

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    Cited by:

    1. Nuno Costa & João Lourenço, 2022. "Bi-Objective Optimization Problems—A Game Theory Perspective to Improve Process and Product," Sustainability, MDPI, vol. 14(22), pages 1-14, November.

    More about this item

    Keywords

    Strategic delegation; managerial incentives; substitutes; complements; process R&D;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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