Bargaining over Managerial Contracts in Delegation Games: The Quadratic Cost Case

Abstract

We again examine how the managers' bargaining power affects social welfare and the firms'' profits in both quantity and price competition, in particular, in the case where each firm''s production technology is represented by a quadratic cost function. We show that under both the competition types, if the relative bargaining power of managers is sufficiently low, increase in the power results in the decrease of each firm''s profit and the increase of social welfare on the other hand, if the managers'' relative bargaining power is sufficiently high, its increase leads to the deterioration of social welfare due to the excessively high total cost in the market. This result is somewhat in contrast to the existing ones obtained in the constant marginal cost case, and hence, our findings show that they are not robust against the change in the type of each firm''s cost function.Bargaining over managerial delegation sales delegation quadratic cost function