IGIDR Working Paper: Investment Choice with Managerial Incentive Schemes

NO : WP-2018-008

AUTHOR : Shubhro Sarkar and Suchismita Tarafdar

TITLE : Investment Choice with Managerial Incentive Schemes


In this paper we show that firms might get an additional strategic benefit from using marginal-cost-reducing investments in conjunction with a managerial incentive scheme. While both these instruments allow firms to aggressively participate in product market competition, we show that they act as strategic substitutes or complements depending on whether they are chosen simultaneously or sequentially under complete information. Given that the use of such instruments is inseparably linked with a Prisoner’s Dilemma kind of situation, our analysis shows a way to mitigate such effects, through their simultaneous use.

Keywords :Strategic delegation, Cost-Reducing Investment, Strategic Substitutes, Strategic
Complements, Subgame Perfection.

JEL Code :C72, L13, D43.

Weblink : http://www.igidr.ac.in/pdf/publication/WP-2018-008.pdf