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Can Erutku
''Competition and Agency Cost''
( 2016, Vol. 36 No.2 )
We look at the effect of competition on the level of cost reducing effort made by an agent in an industry where competition is in quantity with homogeneous products. We find that the principal prefers to keep all the profit rather than sharing it with the agent, who ends up exerting no effort regardless of the number of firms in the industry (provided it is greater than two). This suggests that profit sharing contracts might not be the appropriate mechanism to provide incentives in an industry characterized by principal-agent relationships and where firms compete in quantity.
Keywords: Principal-Agent, Profit Sharing, Quantity Competition, Effort.
JEL: L2 - Firm Objectives, Organization, and Behavior: General
D2 - Production and Organizations: General
Manuscript Received : Jan 26 2016 Manuscript Accepted : Apr 14 2016

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