COMPETITION AND COOPERATION WITHIN A MULTIDIVISIONAL FIRM

The strategic choice of managerial incentives is studied in a multi-ag ent setting using a two-stage game. In the first stage, the principal chooses incentive schemes. Then, agents make their decisions. The game models the structure of multidivisional firms; divisions (agents) are managed independently, but the general office (principal) monitors th eir performance and provides incentives. It explains the rationale for establishing either cooperation or competition across divisions if fi rms face Cournot competition. If divisions are linked because of techn ological reasons (positive spillovers) cooperation should be stimulate d. If they sell substitute products (negative spillovers) competition is needed.