Delegation Game Research Articles

Strategic delegation and second mover advantage in duopoly

We consider a duopoly in which each firm has one owner and one manager playing a multi-stage delegation game. The decision of each firm consists of two stages. In the first stage, the owner offers his manager a contract based on profits and sales. In the second stage, the manager chooses its output or price. Several possible sequential games will be analysed, depending on the sequence of the strategic variables. In the first scenario in which firm 1 makes a contract decision and a producing decision sequentially, and firm 2 follows in the same fashion, we show that any delegation equilibrium in which both owners commit their managers to profit-maximising behaviour disappears. In the second scenario in which the firms first enter into the contract stage and then Stackelberg competition follows in the second stage, sales-based delegation occurs. If firms compete in quantities, second mover advantage appears if firms make simultaneous delegation contracts, while first mover advantage is recovered if they make sequential contracts. If firms compete in prices, the results are reversed.

Control delegation, information and beliefs in evolutionary oligopolies

In an evolutionary delegation game, we investigate the effects on market outputs of different levels of information about the way managers are compensated. When managers are informed about their opponents, the long -- run configuration of the industry depends on market conditions. When managers are informed only on the current composition of the population, only profit maximizing firms survive, no matter what market condition prevails. However, if we further lower the level of information -- by hiding the current composition of the industry -- then we show how managers' beliefs affect the long run equilibrium.

Delegation Games: A Game Theoretical Perspective for Managerial Incentives

Companies employ managers for either practical, legal or administrative reasons. However, no matter what the reason, the good performance of managers and the success of companies are vital elements for firms. At this point, managerial incentives play a key role. In this paper, we use the VFJS model proposed by Vickers (1985), Fershtman and Judd (1987) and Sklivas (1987). We assume that owners in a duopoly each hire a manager with a publicly observable contract which is not renegotiable. The remuneration of a manager consists of a fixed part and a bonus (incentive), which can be based on pure profits, sales, relative profit or market share.We assume that firms have different marginal costs. We find that even an inefficient firm can obtain Stackelberg leadership profits if it compensates its manager with a market share or a relative profit incentive whereas its rival is just owner-led. We also consider duopolies where the efficient firm remunerates its manager with a market share incentive and the rival firm uses a sales, a relative profit or a market share incentive. We find that the efficient firm could achieve Stackelberg leadership profits if the difference between marginal costs of two firms exceeds a certain benchmark. Finally, we determine that the less efficient firm owner always prefers to use a managerial bonus based on relative profits. If the difference between marginal costs is large enough, the owner of the more efficient firm prefers to use a managerial bonus based on market share.

On the Failure of Hindsight-Biased Principals to Delegate Optimally

With the help of a simple model, we show that the hindsight bias can lead to inefficient delegation decisions. This prediction is tested experimentally. In an online experiment that was conducted during the FIFA World Cup 2010, participants were asked to predict a number of outcomes of the ongoing World Cup and had to recall their assessments after the outcomes had been realized. Their answers were used to construct individual measures of the hindsight bias. The participants also had to make choices in a delegation game. Our data confirm that hindsight-biased subjects more frequently fail to delegate optimally than subjects whom we have classified as not hindsight biased. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.2087 . This paper was accepted by Teck-Hua Ho, judgment and decision making.

Delegation study in asymmetric game

This paper distinguishes between two types of delegation: Partial Delegation and Full Delegation, in the context of both spillovers and product differentiation endogenously determined by firms. By studying all possible (symmetric and asymmetric) scenarios, we demonstrate that there are three Nash equilibrium strategy profiles for this delegation game, the Pareto optimal solution is that both firms choose Partial Delegation. Partial Delegation can increase the product variety, foster firms to spend more on R&D, encourage firms to produce high-quality goods, and increase the price and profit. However, it may decrease welfare and hurt consumers’ interests. Consequently, in private view, firms prefer Partial Delegation, but in public view, Full Delegation should be encouraged.

Optimal Upstream SOE's Managerial Delegation and Downstream Industrial Policy Under Successive Duopoly

This paper introduces managerial delegation for a state-owned enterprise (SOE) in a successive duopoly model. There are two home firms, one upstream and one downstream, each competing with a respective foreign firm. All firms are private except the home upstream firm which is an SOE with a managerial incentive contract that contains profit and sales elements. The domestic government maximizes social welfare by choosing the optimal managerial contract for the SOE and the optimal industrial policy for the domestic downstream firm. The paper finds that (1) the optimal incentive contract will never be pure profit maximization; (2) if the SOE has a positive weight on its incentive contract, its equilibrium profit margin will be negative; (3) both domestic firms benefit from a lower SOE's profit-incentive weight; and (4) if the foreign input supplier is sufficiently large, the optimal industrial policy is a tax. The paper also finds that, in the linear case, the SOE's profit margin is always negative, the optimal managerial profit weight is determined by all firms' cost parameters, taxing downstream production is optimal under certain demand and cost conditions, and the foreign upstream firm will choose not to engage in a strategic managerial delegation game.

Delegation equilibrium payoffs in integer-splitting games

This work studies a new strategic game called delegation game. A delegation game is associated to a basic game with a finite number of players where each player has a finite integer weight and her strategy consists in dividing it into several integer parts and assigning each part to one subset of finitely many facilities. In the associated delegation game, a player divides her weight into several integer parts, commits each part to an independent delegate and collects the sum of their payoffs in the basic game played by these delegates. Delegation equilibrium payoffs, consistent delegation equilibrium payoffs and consistent chains inducing these ones in a delegation game are defined. Several examples are provided.

Bargaining over Managerial Contracts in Delegation Games: The Generalized Oligopolistic Case

The main purpose of this paper is to disclose the properties of the equilibrium outcomes in the differentiated‐products model with two stages: (i) owner‐shareholders negotiate managerial compensation with their managers that comprises their profits and sales (sales delegation) and (ii) they engage in their market competition. The other purpose of this paper is to study the differentiated goods model in which an owner bargains the managerial compensation with her/his manager that comprises her/his profit and her/his rival's profit (relative performance delegation). We further investigate the situation wherein the firm with sales delegation and the firm with the relative performance delegation coexist. Copyright © 2012 John Wiley & Sons, Ltd.

On the (Non) Existence of a Price Equilibrium in Delegation Games with Relative Performance Compensation

We show that Miller and Pazgal's (2001) model of strategic delegation, in which managerial incentives are based upon relative performance, is affected by a non-existence problem which has impact on the price equilibrium. The undercutting incentives generating this result are indeed similar to those affecting the stability of price cartels.

A modified Cournot model of the natural gas market in the European Union: Mixed-motives delegation in a politicized environment

With Gazprom gaining prominence as the major supplier of natural gas in the European Union, the European gas market becomes more politicized. We assume that Gazprom's interest as a state monopolist is not only to maximize profit, but also to seek market power, presumably because this contributes to the geopolitical power of Russia at large. We introduce a modeling tool, so-called strategic delegation games, to analyze the implications of Gazprom's operation in the EU. By way of illustration, we model the case where Gazprom competes against two profit-maximizing rivals: Algerian Sonatrach and Norwegian Statoil. We prove that if Gazprom serves any of a comprehensive type of nonprofit objectives, the outcome is beneficial for the EU's consumers, as Gazprom's behavior shifts volumes up and brings prices down.

COMPETITION AND THE STRATEGIC CHOICE OF MANAGERIAL INCENTIVES: THE RELATIVE PERFORMANCE CASE

In this paper we study the role of market competitiveness in a strategic delegation game in which owners delegate output decisions to managers interested in the firm's relative performance. In particular we study how the optimal delegation scheme - i.e. the distortion from pure profit maximization - is affected by market concentration and the elasticity of market demand. We show that these two indexes of market competitiveness do not alter managerial incentives in the same way: while the optimal degree of delegation decreases as the market becomes less concentrated, it increases as demand becomes more elastic.

Location choice with delegation: Bertrand vs. Cournot competition

The conventional wisdom indicates that firms' optimal locations are sensitive to the modes of product–market competition, leading to a difficulty for firms to make concrete location decisions. This difficulty is especially crucial for the high entry-cost firms. The paper develops an uncovered-market model à la Economides (1984) to explore this sensitivity by taking into account a delegation game. It shows that firms' location configurations remain unchanged regardless of the modes of product–market competition as the owners offer the managers a contract with a relative-performance incentive scheme. Moreover, the paper shows that, by introducing a delegation game, the competition between managers under Bertrand competition is mitigated such that the managers have no incentive to choose price undercutting as they locate themselves far enough away from each other.

Stackelberg equilibria in managerial delegation games

Managerial compensation packages do not only influence managers’ behavior, but also have an impact on competing firms. In a managerial delegation game investigating the latter aspect, it is shown that the inherent prisoner’s dilemma situation can be resolved (without changing the normally studied setup or timing). In the first stage, owners choose an incentive function for their managers, in the second stage they choose the weights assigned to that function besides profits and in the third stage managers play a Cournot game. Solving this continuous optimization problem with the implicit function theorem shows that choosing an incentive from the set of “multiplicative incentives”, i.e. any generalized affine transformation of the product of both firms’ quantities, which includes e.g. relative profit, ensures that the Stackelberg outcome is among the set of equilibrium outcomes. Furthermore, it is the unique outcome if the rival owner opts for one of the well-known incentives like sales, revenue or market share. The general approach used allows demonstrating that with no other linear incentive a Stackelberg outcome results and that incentives like profit-to-cost ratio should be avoided. Selecting a multiplicative incentive is a dominant strategy of the game.

A Public Choice Approach to Strategic and Nonstrategic Environmental Policy

In this paper we take a public choice perspective on strategic environmental policy and international environmental agreements. We examine cooperative and noncooperative environmental policies under governments that are either welfare maximizers (“good dictators”) or tax revenue maximizers (“Leviathans”). We show that Leviathans can perform better in terms of welfare and that good dictators can set higher taxes. We then analyze international environmental agreements and show that the breakdown of environmental cooperation can indeed lead to a welfare gain for all signatory countries. Considering a delegation game between governments, we find that a Pareto-superior Leviathan outcome can be the unique Nash equilibrium.

Managerial incentives for technology transfer

This paper studies how a separation of ownership and management affects a firm's incentives to transfer knowledge about technology voluntarily and without payment to a rival in a Cournot duopoly. We consider a three-stage strategic delegation game, where two technologies are available; one with increasing returns to scale and the other with constant returns to scale. While the former is known to both firms, only the more advanced firm initially has access to the latter type of technology. This firm is assumed to be managerial, not only with respect to product market decisions, but also regarding the choice of whether or not to transfer technology to the rival firm. We consider the scope for, and limitations of, the use of strategic management and compare the results with those from traditional models that do not involve technology transfer and models that involve technology transfer, and no strategic management. The resulting technology choices are examined for their welfare implications, and finally we consider the transfer of technology when both firms are managerial.

EQUIVALENCE OF COMPETITION MODE IN A VERTICALLY DIFFERENTIATED DUOPOLY WITH DELEGATION

AbstractThis paper aims to examine the equivalence of competition mode in a vertically differentiated product market with the relative performance delegation. It demonstrates the equivalence of product quality and social welfare in this delegation game, irrespective of modes of product competition. In addition, in a three‐stage game of quality‐delegation‐quantity (or price), it shows that the delegation coefficient is different between high‐quality and low‐quality firms in an asymmetric vertical differentiated model, and a high‐quality firm makes better use of the delegation than a low‐quality firm.

The Berkeley Memorial

We revisit the Cournot duopoly game with strategic delegation and asymmetric costs of Delbono et al. (2016). In particular, the authors claim that a Prisoner Dilemma always arises. However, we show that, by setting properly the admissible parameter set, if the firms are sufficiently different, the efficient firm is better off when both firms delegate production. Therefore, in contrast with the traditional view, we claim that a Prisoner Dilemma is not an inevitable outcome in a strategic delegation game.

On the impact of managerial bonus systems on firm profit and market competition: the cases of pure profit, sales, market share and relative profits compared

AbstractBy designing remuneration schemes based on a bonus rewarding specific firm‐level outcomes, the owners/shareholders of a firm can manipulate the behavior of their managers. In practice, different bonus anchors take center stage: some are profit‐based, others use sales as the key yardstick and still different ones focus on relative performance vis‐à‐vis a peer group. In this paper, we focus on the impact of remuneration schemes on firm‐level profitability. The profit effect is investigated for (all possible combinations of) four bonus systems using delegation games. In the context of a linear Cournot model for two or three firms, we model a two‐ or three‐stage decision structure where, in the first stage (or first two stages), an owner decides on the bonus system for his manager and where, in the final stage, the manager takes the daily output decision for her firm. It appears that the bonus system based on relative (profits) performance is superior throughout. Copyright © 2008 John Wiley & Sons, Ltd.

Maximum‐revenue versus Optimum‐welfare Export Taxes: a Delegation Game*

AbstractIn the Eaton and Grossman (1986) Bertrand duopoly model of strategic export taxes, both countries may be better off if they both delegate to policymakers who maximize tax revenue rather than welfare. However, both countries delegating to policymakers who maximize tax revenue is not a Nash equilibrium unless the degree of product substitutability is sufficiently high. For a wide range of values for the degree of product substitutability, the game is a prisoner's dilemma where both countries are better off delegating to policymakers who maximize tax revenue but both will delegate to policymakers who maximize welfare in the Nash equilibrium.

Delegation with Incomplete and Renegotiable Contracts

It is well known that delegating the play of a game to an agent via incentive contracts may serve as a commitment device and hence provide a strategic advantage. Previous literature has shown that any Nash equilibrium outcome of an extensive-form principals-only game can be supported as a sequential equilibrium outcome of the induced delegation game when contracts are unobservable and non-renegotiable. In other words, in extensive-form games, contracts may affect the equilibrium outcome even when they are unobservable as long as they cannot be renegotiated. In this paper we analyze the equilibrium outcomes of delegation games with unobservable and renegotiable contracts under the assumption that the principal cannot observe every history in the game when played by her agent. This informational assumption implies that contracts are incomplete and we show that such incompleteness restricts the set of equilibrium outcomes to a subset of Nash equilibrium outcomes even without renegotiation. Introducing renegotiation, in general, imposes further constraints and in some games implies that only subgame perfect equilibrium outcomes of the original game can be supported. However, there is a large class of games in which non-subgame perfect equilibrium outcomes of the principals-only game can also be supported, and hence delegation still has a bite even under renegotiable contracts.