Can Managerial Bonuses Be a Balance between Free Trade and Protectionism in International Trade? A Game Theoretical Perspective

In this research we show that managerial bonuses can be a way of reducing tariffs while keeping domestic welfare high. For this we analyze all types of bonuses based on pure profit, sales, relative profit and market share. We prove that for the domestic country encouraging the domestic firm to employ a sales, relative profit or market share bonus leads to low tariffs but high welfare. As for the domestic firm, we show that the market share bonus (which was introduced by Jansen et al. (2007) and Ritz (2008)) is the optimal bonus. We find that this market share bonus brings Stackelberg Leadership profits to the domestic firm. We also show that in the equilibrium the domestic firm always applies the market share bonus and the foreign firm uses a sales, relative profit or market share bonus