The Strategic Role of Managerial Incentives on Supplier Capacity Investment
نویسندگان
چکیده
Many firms tie the compensation of their managers to financial performance. Such performance based compensation is commonly explained as a means of providing managers with incentives to exert effort to increase the profits of the firm. However, we explore an alternative role that performance based compensation can play: By providing management with appropriate incentives, a compensation plan can serve as a credible commitment to higher levels of output. Such a commitment may be strategically important as a means of encouraging suppliers to enter the industry and invest in capacity, particularly when it is difficult to enter fully contingent long term contracts. We examine the consequences of insufficient entry of suppliers and show that a firm’s owners may be able to benefit from delegating decision rights to managers who have incentives that may appear to be inconsistent with maximizing the firm’s profits. (holdup problem, supplier investment, strategic delegation, managerial incentives) ∗The University of Texas at Austin, McCombs School of Business, [email protected] †California State Polytechnic University, College of Business Administration, [email protected]
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