Abstract:
This thesis yields findings on the characteristics of optimal linear incentive contracts based on relative performance evaluation in duopolistic competition by an agency theoretic analysis under alternative shapes of product market competition. In particular, the analysis focuses on controlling an agent’s effort and his product market behavior by including the weighted sum of own firm profit and a rival’s firm profit into the basis of his variable payment. In duopoly exist interdependencies between the principal’s incentive contract design and the agent’s output decisions influenced by their incentive contracts.
The results show, that the optimal contract parameters for controlling an agent’s effort and his product market behavior depend strongly on the shape of product market competition, the sequence of output decisions, and product characteristics. The results for sequential competition yield findings on the benefits of the market position as leader or follower. Moreover, contract renegotiations as well as information cost can influence decisively the situation specific contract design.
The results lead to implications for implicit empirical studies on executive compensation. In particular, they show that hypotheses based on less differentiated models rely on special cases with limited applicability as basis for cross-sectional studies. Further, the results help to improve hypotheses and test methods concerning the relevance of relative performance evaluation. Thus, considering samples of firms with similar product market characteristics or similar market positions may be advantageous.