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Optimal Upstream SOE's Managerial Delegation and Downstream Industrial Policy under Successive Duopoly

27 Pages Posted: 26 Mar 2014 Last revised: 20 Mar 2016

Winston W. Chang

State University of New York at Buffalo - Department of Economics

Fang-yueh Chen

National Chung Cheng University - Department of Economics

Date Written: January 15, 2015

Abstract

This paper introduces managerial delegation for a state-owned enterprise (SOE) in a successive duopoly model. There are two home firms, one upstream and one downstream, each competing with a respective foreign firm. All firms are private except the home upstream firm which is an SOE with a managerial incentive contract that contains profit and sales elements. The domestic government maximizes social welfare by choosing the optimal managerial contract for the SOE and the optimal industrial policy for the domestic downstream firm. The paper finds that (1) the optimal incentive contract will never be pure profit maximization; (2) if the SOE has a positive weight on its incentive contract, its equilibrium profit margin will be negative; (3) both domestic firms benefit from a lower SOE's profit-incentive weight; and (4) if the foreign input supplier is sufficiently large, the optimal industrial policy is a tax. The paper also finds that, in the linear case, the SOE's profit margin is always negative, the optimal managerial profit weight is determined by all firms' cost parameters, taxing downstream production is optimal under certain demand and cost conditions, and the foreign upstream firm will choose not to engage in a strategic managerial delegation game.

Keywords: Vertically Related Markets; International Mixed Duopoly; Managerial Delegation; Production Subsidy

JEL Classification: D21, H21, H44, L21, L30

Suggested Citation

Chang, Winston W. and Chen, Fang-yueh, Optimal Upstream SOE's Managerial Delegation and Downstream Industrial Policy under Successive Duopoly (January 15, 2015). Available at SSRN: https://ssrn.com/abstract=2414690 or http://dx.doi.org/10.2139/ssrn.2414690

Winston W. Chang (Contact Author)

State University of New York at Buffalo - Department of Economics ( email )

453 Fronczak Hall
Department of Economics, SUNY at Buffalo
Buffalo, NY 14260
United States
716-645-8671 (Phone)
716-645-2127 (Fax)

HOME PAGE: http://economics.buffalo.edu/facultyprofiles/winston-chang/

Fang-yueh Chen

National Chung Cheng University - Department of Economics ( email )

160 San-Hsing
Ming-Halung, Chia-Yi, 621
Taiwan, Republic of China
+886-5-2720411 Ext. 6195 (Phone)
+886-5-2720816 (Fax)

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