Competition, Risk, and Managerial Incentives
研究行业竞争程度如何影响企业为管理者提供的最优激励，发现竞争加剧会增强成本降低激励，同时提高企业利润波动性，导致激励与风险正相关。
This paper examines how the degree of competition among firms in an industry affects the optimal incentives that firms provide to their managers. A central assumption is that there is free entry and exit in the industry, which implies that changes in the nature of competition lead to changes in the equilibrium market structure. The main result is that as the intensity of product market competition increases (as a result of greater product substitutability or greater market size), principals unambiguously provide stronger incentives to their agents to reduce costs. At the same time, more intense competition also leads to more volatile firm-level profits. Consequently, managers’ incentives are positively correlated with firm-level risk, consistent with empirical evidence. A decrease in the cost of entering the market has the opposite effect on incentives, but still induces a positive correlation between risk and incentives.