Product market competition and organizational slack under profit-target contracts

Oligopolistic Screening and Two-Way Distortion

“…This is equivalent to the case considered by Martimort (1996) and Piccolo et al (2008) in their models with perfectly correlated types. As one would expect, the availability of a more comprehensive contract reduces the equilibrium e¤ort but does not change the qualitative nature of our results: two way distortions remain and no-distortion at the top disappears.…”

“…Taking (12) and imposing symmetry gives immediately the two equilibrium conditions (13) and (14). By solving the system of two equations we get the optimal level of e¤ort: 15) and…”

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

“…Piccolo et al. () have analyzed cost‐plus contracts à la Laffont and Tirole (1986) in a Cournot duopoly with perfectly correlated shocks, which excludes any strategic interaction between contracts: the agency problem remains formally equivalent to that of a monopolist. Note that these works emphasize the relation between product substitutability and managerial incentives, while we mainly focus on the relation between entry of firms in the market and incentives.…”

“…Part of the literature on contract theory (Ivaldi and Martimort, 1994;Stole, 1995;Martimort, 1996) has analyzed duopolies engaged in price discrimination, which generates a problem of common agency that is fundamentally different from our competitive interaction between two principal-agent hierarchies. Piccolo et al (2008) have analyzed cost-plus contractsà la Laffont and Tirole (1986) in a Cournot duopoly with perfectly correlated shocks, which excludes any strategic interaction between contracts: the agency problem remains formally equivalent to that of a monopolist. Note that these works emphasize the relation between product substitutability and managerial incentives, 2 while we mainly focus on the relation between entry of firms in the market and incentives.…”

“…Piccolo et al. () examine also the case of profit‐target contracts, which leads again to equilibria with the traditional no distortion at the top and a downward distortion on the effort of the inefficient managers: the interesting aspect is that the effort of the inefficient managers may be nonmonotonic in the degree of product substitutability.…”