Product-Market Competition and Managerial Autonomy

This paper proposes a theory of the impact of product-market competition on managerial decision-making autonomy based on managers’ concern about keeping their incumbency rents (that competition puts at risk), and on the idea that changes in market conditions a¤ect the congruence between the interests of the di¤erent hierarchical levels. The main focus of my analysis is on how changes in market conditions a¤ect the compatibility or congruence between the interests of the principal and the manager, and thus the trade-o¤ between loss of control and better information under delegation. To this end, I build a model of authority within the …rm, in which the degree of con‡ict between the parties is endogenous. My main result is that higher degrees of managerial autonomy are more likely for intermediate levels of competition. Increased competition may induce a manager, who risks having his rents reduced if performance is poor, to make decisions (which a¤ect not only the expected returns of the …rm, but also their riskiness) more in line with the interests of the organization— but further increases in competitive forces might as well lead him to take excessive risks. With an intermediate level of competition, the threat on incumbency rents is just enough to align the manager’s interests with those of the organization without pushing him to take value-reducing risks. JEL Codes: D23, L22, M12, M21