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| Author: | Schmidt, K. M. |
| Title: | Managerial incentives and product market competition |
| Journal: | Review of Economic Studies
1997 : APR, VOL. 64(2):219, p. 191-213 |
| Index terms: | MANAGEMENT INCENTIVES PRODUCTS MARKETS COMPETITION |
| Language: | eng |
| Abstract: | Increasing competition increases the probability that firms with managerial slack are forced into liquidation.This leads to a threat-of-liquidation effect which unambiguously induces the manager to work harder in order to improve the internal efficiency of the firm. An important question is whether the principal can affect the probability of liquidation directly through the financial structure of the firm in order to improve managerial incentives. The paper also demonstrates that the threat-of-liquidation effect is not sufficient to guarantee that more competition always increases managerial effort. Managerial effort is determined endogenously through the optimal incentive scheme employed by the owners of the firm. If competition reduces the value of a cost-reduction to the owner, he may induce the manager to work less hard. |
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