Divisionalization and strategic managerial incentives in oligopoly under uncertainty

This paper argues that divisionalization and incentive contracting are comp lementary rent shifting tools in the presence of demand uncertainty. The ro le for divisionalization arises if managers know the state of demand prior to making output decisions and if incentive contracts are Linear and non-st ate contingent. In this context incentive contracts achieve expected Stacke lberg outcomes but have no impact on the firm's responsiveness to demand sh ocks. Divisionalization. on the other hand has the strategically beneficial effect of making the firm more responsive to demand shocks. (C) 1999 Elsev ier Science BN. All rights reserved. JEL classification: L10; L20; L40.