The Strategic Choice of Managers and Managerial Discretion

Abstract

Managerial discretion is likely to be beneficial to shareholders because of strategic cross-effects in an oligopoly. In certain circumstance, shareholders deliberately keep certain managerial discretion in equilibrium even the reduction of managerial discretion is cost free. It is found that positive effects of managerial discretion on profits can only be created by power-building (shirking) managers if the market prevails quantity (price) competition. In comparison with conventional Cournot (Bertrand) model, quantity (price) competition with the separation of owners and managers leads to greater (smaller) outputs, lower (higher) prices and less (more) profits.

Keywords: Corporate Governance, Agency Problem, Managerial Monitoring and Compensation, Managerial Discretion, Oligopoly

JEL Classification: G30, L20