Correlated equilibria in a Cournot duopoly with managerial incentives

We study strategic delegation in a Cournot duopoly with linear demand and asymmetric constant marginal costs where each firm offers its manager incentive contracts that are based on either the firm's profit or its revenue. Taking the equilibrium outcomes of the Cournot stage into consideration, the reduced form delegation game is a 2 × 2 anti-coordination game. Using the results of Calvó-Armengol [2003], we characterize the set of all correlated equilibria of this game. We show that for certain parametric configurations of the model (involving the demand intercept and cost differences), there is a continuum of correlated equilibrium outcomes under which the high-cost firm obtains a higher profit than the low-cost firm.