SFB 303 Discussion Paper No. A-430

Author: Schmidt, Klaus M.
Title: Managerial Incentives and Product Market Competition
Abstract: The paper shows that an increase in competition has two effects on managerial incentives: It increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the firms' profits, which may make it less attractive to induce high effort. Thus, the total effect is ambiguous. I identify natural circumstances where increasing competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple example demonstrates that - starting from a monopoly - managerial effort may increase as additional competitors enter the market, but will eventually decrease when competition becomes too intense.
Keywords: Managerial Incentives, Competition, Moral Hazard
JEL-Classification-Number: D20, L14
Creation-Date: January 1994
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