Managerial incentives and endogenous coalition formation with externalities

This paper examines the managerial incentives of oligopolistic firms with Cournot competition when they have an opportunity to form a coalition for cost reduction. The analysis shows that the introduction of managerial incentives reduces a firm’s incentive to form a coalition. Moreover, a firm that belongs to a coalition has an increased managerial incentive (i.e., it becomes more sales-oriented) as its coalition becomes larger. However, in equilibrium, because of externalities generated from the coalition structure and product market competition, the managerial incentive of a firm in a large coalition can be greater than that of a firm in a grand coalition, while the managerial incentive of a firm in a small coalition can be less than that of a firm under stand-alone production.

► This paper examines managerial incentives and endogenous coalition formation. ► Managerial incentives reduce a firm’s incentive to form a coalition. ► Managerial incentives become larger as a coalition becomes larger. ► Equilibrium managerial incentives can be greater than that in a grand coalition because of negative externalities. ► Equilibrium managerial incentives can be smaller than that under stand-alone production because of negative externalities.