Equilibrium Incentives in Oligopoly

Abstract

The authors examine the incentives which competing principals give their agents, focusing on two oligopoly models where owners write incentive contracts with the ir managers. Under Cournot quantity competition, each manager's margi nal payment for production will exceed the firm's marginal profit. De viations from profit maximization are reduced by ex ante uncertainty about costs and increased by ex ante correlation between the firms' c osts. In contrast, in a differentiated goods market with price compet ition, managers receive less than their marginal profit. In general, a principal will distort his agent's incentives when the agent compet es with agents of competing principals. Copyright 1987 by American Economic Association.

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