Divisionalization and strategic managerial incentives in oligopoly under uncertainty

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