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Agency Problems in a Competitive Conglomerate with Production Constraints

Authors
  • Herrera-Velasquez, Jose de Jesus
Publication Date
Sep 01, 2022
Source
Kyoto University Research Information Repository
Keywords
Language
English
License
Unknown

Abstract

This study explores the reciprocal effects between agency problems and market competition. We develop an adverse selection model of a competing conglomerate with production constraints. The conglomerate participates as the leader in two different duopolistic markets with a Stackelberg-Cournot framework and heterogeneous goods. The conglomerate is run by its headquarters and two division managers. The agency problem arises because the market demand size is a manager's private information, which the headquarters try to elicit by a contract mechanism. We fully characterize a first and a second-best contract. When the production constraints make the first best outcome unattainable, the second-best contract is either separating or pooling, depending on the severity of the constraints. The separating second-best contract sometimes improves the ex-ante welfare in comparison to a symmetric information benchmark. The pooling second-best contract never improves the ex-ante welfare. We also find that at an intermediate level of substitutability, the second-best contract is most likely to coincide with the first-best one, and any departure from that level toward either substitutability or complementarity makes the attainment of the first-best outcome less likely.

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