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Relative Performance Evaluation, Risk Aversion and Entry

Author

Listed:
  • Jean-Daniel Guigou

    (Luxembourg School of Finance, University of Luxembourg)

  • Bruno Lovat
  • Gwenaël Piaser

    (Luxembourg School of Finance, University of Luxembourg)

Abstract

We study the relations between compensation schemes and risk aversion of managers in a strategic framework. We first show that the use of relative performance evaluation (RPE) in compensation contracts reduces the equilibrium profits of Cournot firms if managers are not too risk averse. Second, we introduce entry issues in our model. We then show that forbidding RPE can favour competition.

Suggested Citation

  • Jean-Daniel Guigou & Bruno Lovat & Gwenaël Piaser, 2007. "Relative Performance Evaluation, Risk Aversion and Entry," LSF Research Working Paper Series 07-07, Luxembourg School of Finance, University of Luxembourg.
    • Handle: RePEc:crf:wpaper:07-07
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    File URL: http://www.lsf.lu/eng/content/download/489/2664/file/07-07.pdf
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    More about this item

    Keywords

    Executive Compensation; Relative Performance Evaluation; Moral Hazard; Market Structure.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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