COMPETITION IN THE PRODUCT MARKET AND MANAGERIAL INCENTIVES: THE CASE OF COURNOT EQUILIBRIUM

Abstract

In this paper, we examine the effect of increasing competitiveness defined by the increase in the number of firms competing in a product market on the risk and incentive of managers of managerial firms. If the costs are perfectly correlated, Cournot competition will reduce the risk each firm must bear and enhance the level of effort of the risk-averse manager. Even in this case, however, free entry does not bring about socially optimal managerial effort. On the other hand, if the costs are stochastically independent, the increase in the number of firms can give managers additional risk and lower managerial incentive.