MANAGERIAL INCENTIVES AND PRODUCT MARKET COMPETITION

The paper shows that an increase in competition has two effects on man agerial incentives: It increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the f irm's profits, which may make it less attractive to induce high effort . Thus, the total effect is ambiguous. I identify natural circumstance s where increasing competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple ex ample demonstrates that-starting from a monopoly-managerial effort may increase as additional competitors enter the market, but will eventua lly decrease when competition becomes too intense.