Publication: Career concerns and competitive pressure
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2005-11
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Abstract
In a duopoly model I study the effects of increased competitive pressure on the implicit incentives provided by career concerns. By building a good reputation, managers are able to capture on the labor market part of the profits that they produce in excess with respect to less talented managers. Increased competition, then, has an ambiguous effect: it raises the reputational concern to the extent that it makes to hire a good manager more valuable. The threat of a hostile takeover is then introduced and it is shown to reduce managerial salary while having a potentially negative effect on ex ante incentives. In particular, it is argued that if alternative governance systems are already available, the threat of a hostile takeover can be harmful.