Journal Article

Managerial Incentives and Product Market Competition

Klaus M. Schmidt

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 64, issue 2, pages 191-213
Published in print April 1997 | ISSN: 0034-6527
Published online April 1997 | e-ISSN: 1467-937X | DOI:
Managerial Incentives and Product Market Competition

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The paper shows that an increase in competition has two effects on managerial incentives: It increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the firm's profits, which may make it less attractive to induce high effort. Thus, the total effect is ambiguous.

I identify natural circumstances where increasing competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple example demonstrates that—starting from a monopoly—managerial effort may increase as additional competitors enter the market, but will eventually decrease when competition becomes too intense.

Journal Article.  0 words. 

Subjects: Economics

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