Delegated Management in Dynamic Oligopolies

This paper studies the strategic value of delegation in dynamic interactions, where principals provide managers with intertemporal incentives in order to obtain a competitive advantage. While direct management offers intertemporal commitment opportunities, the separation of ownership from production decisions allows precommitment within the current period. The solution concept of Markov-perfect equilibrium helps avoid the imposition of exogenous restrictions on the composition and the functional form of compensation contracts. The linear-quadratic game yields a tractable MPE that illustrates the properties of dynamic delegation: i) with low adjustment costs and discount factors delegating principals are able to attain output levels close to those of a Stackelberg leader; ii) managerial utility parameters affect equilibrium wages, but have no impact on production choices.