The Strategic Choice of Managerial Incentives

Do firms with separate owners and managers maximize profits? We address this question for an oligopoly where managers compete in quantities or prices, as in the Cournot or Bertrand models, and owners choose their managers' incentives. We find that there is a strategic aspect in the problem of selecting incentives and that profit-maximizing behavior does not result. In particular, in the oligopoly we study, the behavior of firms competing in quantity (price) more closely resembles perfectly competitive (collusive) behavior than Cournot (Bertrand) behavior.