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Zheng Wang
''Delegation and Vertical Externalities''
( 2015, Vol. 35 No.2 )
Previous research shows that the presence of a monopoly upstream eliminates the incentive of duopoly downstream owners to strategically delegate quantity choices. I show that this “vertical externality” associated with the presence of the upstream monopoly vanishes when delegating by a relative performance contract. Moreover, I show that the relative performance contract will be endogenously chosen instead of the revenue contract associated with the externality. While this result exists with constant returns to scale, it does not persist in the case of decreasing returns to scale.
Keywords: Strategic Delegation, Vertical Externality, Relative Performance Contract
JEL: D4 - Market Structure and Pricing: General
L2 - Firm Objectives, Organization, and Behavior: General
Manuscript Received : Nov 18 2014 Manuscript Accepted : May 14 2015

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