Managerial incentives for mergers

Abstract

We study managerial incentives in a model where managers take not only product market but also takeover decisions. We show that the optimal contract includes an incentive to increase the firm's sales, under both quantity and price competition. This result is in contrast to the previous literature and hinges on the fact that with a more aggressive manager rival firms earn lower profits and are willing to sell out at a lower price. \\ However, as a side--effect of such a contract, the manager might take over more rivals than would be profitable.