Competition, Risk and Managerial Incentives

23 Pages Posted: 8 Mar 2001

See all articles by Michael Raith

Michael Raith

University of Rochester - Simon Business School

Multiple version iconThere are 2 versions of this paper

Date Written: February 2001


This paper examines how the degree of competition among firms in an industry affects the optimal incentives that firms provide to their managers. A central assumption is that there is free entry and exit in the industry, which implies that changes in the nature of competition lead to changes in the equilibrium market structure. The main result is that as the intensity of product market competition increases, principals unambiguously provide stronger incentives to their agents to reduce costs, and hence agents work harder. At the same time, more intense competition also leads to a higher volatility of both firm-level profits and managers' compensation. Consequently, managers' incentives are positively correlated with firm-level risk, consistent with empirical evidence.

Keywords: Competition, Incentives, Risk, X-efficiency

JEL Classification: D43, L13, L22

Suggested Citation

Raith, Michael, Competition, Risk and Managerial Incentives (February 2001). Available at SSRN: or

Michael Raith (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-8380 (Phone)
585-273-1140 (Fax)


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