Working Paper: CEPR ID: DP1325
Authors: Ramon Faulfoiier; Massimo Motta
Abstract: We study managerial incentives in a model where managers take not only product market but also take-over decisions. We show that the optimal contract includes an incentive to increase the firm's sales, under both quantity and price competition. This result contrasts with the previous literature, and hinges on the fact that with a more aggressive manager rival firms earn lower profits and are willing to sell out at a lower price. As a side-effect of such a contract, however, the manager might take more rivals over than it would be profitable.
Keywords: incentives; takeovers; merger profitability
JEL Codes: G34; L2; L12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Owner's contract decision (incentives) (D86) | Manager's aggressive behavior (M54) |
| Manager's aggressive behavior (M54) | Rival firms' reduced profits (D43) |
| Rival firms' reduced profits (D43) | Increased likelihood of mergers (G34) |
| Owner's contract decision (incentives) (D86) | Increased likelihood of mergers (G34) |
| Manager's aggressive behavior (M54) | Unprofitable mergers (G34) |
| Owner's contract decision (incentives) (D86) | Unprofitable mergers (G34) |