Product-Market Competition and Managerial Autonomy

Abstract

It is often argued that competition forces managers to make better choices, thus favoring managerial autonomy in decision making. I formalize and challenge this idea. Suppose that managers care about keeping their position or avoiding interference, and that they can make strategic choices that affect both the expected profits of the firm and their riskiness. Even if competition at first pushes the manager towards profit maximization as commonly argued, I show that further increases in competitive forces might as well lead him to take excessive risks if the threat on his position is strong enough. To curb this possibility, the principal-owner optimally reduces the degree of autonomy granted to the manager. Hence higher levels of managerial autonomy are more likely for intermediate levels of competition.

Keywords: product-market competition, authority, decision making, delegation, autonomy

JEL Classification: D23, L22, M12, M21