STRATEGIC DELEGATION WITH ENDOGENOUS COSTS - A DUOPOLY WITH WAGE BARGAINING

This paper examines the owners' problem of strategic delegation when managers choose the level of sales and are responsible for cost control. Fershtman and Judd (American Economic Review 1987, 77, 927-940) and Vickers (Economic Journal, 1985, 95, 138-147) showed that when managers are responsible for sales alone in oligopolistic markets, then owners will want managers to maximise sales rather than profits. In this paper the cost structure as well as sales depends on the choices of managers. Owners want managers to act more like profit maximisers when cost control is important. This issue is analysed in the context of a model with union bargaining. In the model it is shown that stronger unions may benefit owners because of the strategic incentive setting process and that the need for cost control can actually raise profitability.