Equilibrium Principal‐Agent Contracts: Competition and R&amp;D Incentives

Etro, Federico; Cella, Michela

doi:10.1111/jems.12021

Cited by 15 publications

(9 citation statements)

References 38 publications

(68 reference statements)

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“…in Etro and Cella (2013), showing that an increase in the number of …rms increases the compensation di¤erentials between (any) two types of managers, which suggests a …rst empirical prediction: a positive relation between competition and high-powered incentives. Here we have seen that a reduction in the correlation of shocks increases the compensation di¤erentials, which suggests a second empirical prediction: a negative relation between covariance of industry shocks and high-powered incentives.…”

Section: Commitments Entry and Empirical Predictionsmentioning

confidence: 95%

“…The principal, whose manager is of type k , will now maximize expected pro…ts: When we move to the case of asymmetric information inside each hierarchy, informational rents have to be paid to e¢ cient types. 15 Each principal chooses contracts to maximize expected pro…ts under the individual rationality constraint for the ine¢ cient manager and the incentive compatibility constraint for the e¢ cient one. The equilibrium conditions for the levels of e¤ort e 1 ( ) and e 2 ( ) can be now derived as:…”

Section: Imperfectly Correlated Typesmentioning

confidence: 99%

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Contract competition between hierarchies, managerial compensation and imperfectly correlated shocks

Cella

Etro

2016

J. Econ.

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We analyze competition through incentive contracts for managers in duopoly. Privately informed managers exert surplus enhancing e¤ort that generates an externality on the rival. Asymmetric information on imperfectly correlated shocks creates a two-way distortion of e¤orts under strategic substitutability in e¤ort and a double downward distortion under strategic complementarity in e¤ort. In the …rst case, as with contracts for R&D activity or small contractual spillovers for quantity and price competition, increasing the correlation of types reduces the polarization of contracts and the di¤erentials in managerial compensations between e¢ cient and ine¢ cient managers. In the second case, as with large contractual spillovers, the opposite occurs.

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Section: Commitments Entry and Empirical Predictionsmentioning

confidence: 95%

Section: Imperfectly Correlated Typesmentioning

confidence: 99%

Contract competition between hierarchies, managerial compensation and imperfectly correlated shocks

Cella

Etro

2016

J. Econ.

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“…Finally, this paper also brings a contribution to the theoretical literature studying the interaction between product market competition and managerial compensation (Chalioti, 2015;Chalioti & Serfes, 2017;Etro & Cella, 2013;Piccolo et al, 2008;Raith, 2003, among others). In most of these works the focus is on agency conflicts due to moral hazard problems, whereas in our analysis the interaction between competition and innovation is studied within a principalagent model with hidden knowledge and the results are driven by the crucial assumption that the distribution of firm's types is endogenous and depends on the outcome of the R&D process.…”

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confidence: 88%

R&D incentives and competitive pressure under hidden information

Romano

2021

Southern Economic Journal

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Within a principal-agent model, the paper studies how hidden information affects incentives to invest in demand-enhancing R&D of a firm competing in the product market. The analysis shows that, when the R&D outcome is private information of the innovating firm not only compared to its competitor, but also relative to its supplier, a contractual cost arises which neutralizes the standard strategic benefit of R&D and reduces the incentives to invest. Moreover, within this setting, more intense competition always stifles innovation.

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“…Ha et al (2011) study the incentive of vertical information sharing when the upstream firms' production technologies exhibit diseconomies of scale. Etro and Cella (2013) study incentive contracts for competing firms that engage in R&D activities by hiring privately informed managers. In Li et al (2015a), a supplier may encroach and compete with a reseller.…”

Section: Literature Reviewmentioning

confidence: 99%

Sourcing Competition under Cost Uncertainty and Information Asymmetry

Shao

Zhang

2020

Production and Operations Management

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Driven by increasing costs in the traditionally regarded low‐cost manufacturing bases (e.g., China), many firms have started to outsource their production to the regions of even lower costs (e.g., Southeast Asia). However, a new environment may involve higher cost uncertainty and severer information asymmetry. Motivated by these observations, we consider a sourcing game where competing firms choose between a supplier with transparent certain cost (type‐C supplier) and a supplier with potentially lower but less transparent, uncertain cost (type‐U supplier). We characterize the equilibrium of the sourcing game and study how different parameters affect the firms’ sourcing strategy and profit performance. First, we find that due to information asymmetry, a large market size can make firms prefer the C‐supplier to the U‐supplier even if the latter has a lower average cost. Second, reducing the cost uncertainty or improving the signal accuracy of the U‐supplier does not necessarily make it more attractive to sourcing firms, which cautions the suppliers when making efforts to mitigate cost uncertainty or improve cost estimation. Third, higher competition intensity makes the diversified sourcing strategy more likely to be adopted under certain conditions. Interestingly, increasing the cost of the C‐supplier (e.g., a cost hike in China) may make both sourcing firms better off because it can lead to a new sourcing equilibrium. Finally, this study shows that the direction of quantity distortion under the optimal competitive mechanism differs from that under the traditional monopolistic setting.

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Equilibrium Principal‐Agent Contracts: Competition and R&D Incentives

Cited by 15 publications

References 38 publications

Contract competition between hierarchies, managerial compensation and imperfectly correlated shocks

Contract competition between hierarchies, managerial compensation and imperfectly correlated shocks

R&D incentives and competitive pressure under hidden information

Sourcing Competition under Cost Uncertainty and Information Asymmetry

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