ENTRY AND MANAGERIAL INCENTIVES

This paper presents a two-period full-information model of entry where owners of incumbent and entrant firms endogenously select the incentive schemes for their managers. It is shown that when output decisions are delegated to managers, the incumbent's owner chooses to base incentive schemes only partly on profit. But if output decisions are reached via Nash bargaining between managers, the incumbent's owner will base the reward on profit alone. The entrant never bases the incentive scheme solely on profit. If there is a sufficiently high fixed cost of entry, then the incumbent can deter entry by providing management with appropriate incentive schemes.