Strategic delegation in cournot oligopoly with incomplete information

Abstract

This chapter contains a model of strategic delegation from owners to managers in a Cournot duopoly where firms compete under incomplete information on the rival marginal costs and the relations between owners and managers are characterised by moral hazard It is shown that despite incomplete information the owners are able to use strategically the delegation of the output decision by making the managers' incentive schemes observable. Strategic delegation enhances the equilibrium level of the managers' effort, decreasing all firms' marginal costs and so increasing expected output. When moral hazard results in under-provision of effort, strategic delegation has a counter-balancing effect on the loss of productivity due to agency costs. On the other hand, collusive agreements are shown to weaken the disciplinary role on managers of product market competition. In the linear demand case is also shown that the equilibrium industry output in each state of nature is lower with strategic delegation than otherwise, so that the equilibrium price is distorted toward the monopoly price. Therefore, the expected output increase is all due to the better states of nature becoming more likely. However, at difference from what happens with strategic delegation under complete information in the output setting game, in this model consumers may not benefit from strategic delegation, since consumer's surplus is convex in output.