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Investment choice with managerial incentive schemes

Author

Listed:
  • Shubhro Sarkar

    (Indira Gandhi Institute of Development Research)

  • Suchismita Tarafdar

    (Shiv Nadar University)

Abstract

In this paper we show that firms might get an additional strategic benefit from using marginal-cost-reducing investments in conjunction with a managerial incentive scheme. While both these instruments allow firms to \aggressively" participate in product market competition, we show that they act as strategic substitutes or complements depending on whether they are chosen simultaneously or sequentially under complete information. 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 such effects, through heir simultaneous use.

Suggested Citation

  • Shubhro Sarkar & Suchismita Tarafdar, 2018. "Investment choice with managerial incentive schemes," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2018-008, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2018-008
    as

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    File URL: http://www.igidr.ac.in/pdf/publication/WP-2018-008.pdf
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    References listed on IDEAS

    as
    1. A. Michael Spence, 1979. "Investment Strategy and Growth in a New Market," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 1-19, Spring.
    2. B. Curtis Eaton & Richard G. Lipsey, 1981. "Capital, Commitment, and Entry Equilibrium," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 593-604, Autumn.
    3. Evangelos Mitrokostas & Emmanuel Petrakis, 2014. "Organizational structure, strategic delegation and innovation in oligopolistic industries," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 23(1), pages 1-24, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Strategic delegation; Cost-Reducing Investment; Strategic Substitutes; Strategic complements; Subgame perfection;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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