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Managerial risk-taking incentives, product market competition, and welfare

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>04/2004
<mark>Journal</mark>European Economic Review
Issue number2
Volume48
Number of pages11
Pages (from-to)391-401
<mark>State</mark>Published
<mark>Original language</mark>English

Abstract

Managers’ compensation may increase with the variance of the firm's profits. This paper investigates how this affects their choice of strategic variables, and how that affects managerial compensation. The social welfare aspects of this interaction are analyzed in a duopoly setting with uncertain linear demand and linear marginal cost. Compared to a situation in which the managers’ compensation does not depend on the variance of profits, social welfare may be either higher, lower, or remain unaffected, depending on the slope of the marginal cost curve and whether the competing firms produce goods that are demand substitutes or complements.