Seminar
Competition, Quality and Managerial Slack
Uday Rajan (University of Michigan)
Fédération des Banques Françaises Seminar
TSE, May 16, 2011, 12:30–14:00, room MF 323
Reference
Uday Rajan (University of Michigan), “Competition, Quality and Managerial Slack”, Fédération des Banques Françaises Seminar, TSE, May 16, 2011, 12:30–14:00, room MF 323.
Abstract
We consider the role of product market competition in disciplining managers in a moral hazard setting. Competition has two effects on a firm. First, the expected revenue or the marginal benefit of effort declines, leading to weakly lower effort. Second, the cost of inducing high effort increases (decreases) if competition increases (decreases) the probability of failure at a firm. Both effects imply a change in the optimal level of effort as competition increases. The manager in our model enjoys slack if he supplies low effort in equilibrium. We show that managerial slack increases rather than decreases with competition. We reconcile this result with contrary empirical findings by pointing out that what has been empirically tested is changes in slack in response to exogenous changes in the private benefit of low effort, rather than the level of managerial slack itself.
Research partnership
Fédération des Banques Françaises Research Initiative (sustainable)