Reversing Roles: Stackelberg Incentive Contract Equilibrium

Authors:
Richard E. Ludwick, Jr.
Working Paper:
206

This analysis derives the optimal incentive contracts owners offer managers who engage in Stackelberg-quantity competition. In contrast to the Coumot case, the owner of the leading firm motivates his manager to strictly maximize profits and thereby gives no incentives for increased production. This results in a reversal of the usual Stackelberg outcome; output and profits for the leading firm are less than those of the follower's. In another reversal of the standard Stackelberg result, the leader's output and profits are lower compared to when outputs are chosen simultaneously whereas the follower's are greater. While the owner of the leading firm then wants his manager to engage in simultaneous quantity competition, the manager always chooses to be a leader irrespective of his incentive contracts.