Bargaining over Managerial Contracts in Delegation Games: The Differentiated Goods Case

Abstract

This paper investigates the bargaining between owners and managers over their managerial delegation contracts, in order to explain the disclosure obligation that is central to many modern corporate governance codes. We consider the managerial incentive contracts based on the profit and sales of each firm and the delegation game with bargaining in two types of differentiated-products duopolistic competition wherein each firm's manager chooses his or her own output or price. We show that in equilibrium, the profit of each firm decreases, whereas the consumer surplus and social welfare increase as the relative bargaining power of the managers increases in both quantity and price competitions. Thus, we find that similar to the case of the quantity competition wherein both firms produce homogeneous goods in Witteloostuijn et al. (2007), the managerial power of managers is positively associated with social welfare.