Abstract
This paper investigates the issue of strategic delegation by considering the role of management centrality in contracting with different stakeholders. In a sequential negotiation unionized duopoly model, the results obtained by profit-maximizing entrepreneurial firms (where strategic choices are taken by firm owners and wage bargaining involves owners and unions) are compared against those of managerial firms (where strategic choices are delegated to managers who are also involved in wage bargaining vis-à-vis unions). Differences in the relative bargaining power among stakeholders (owners, managers and unions) play a key role in determining optimal delegation contracts, as well as the endogenous choice by firm owners to delegate strategic decisions to the management. Moreover, the distribution of stakeholders’ relative bargaining power affects firms’ profitability and overall welfare. In particular, to minimize potential conflict of interests between firm owners and the overall society, regulation directed to soften the managers’ bargaining strength vis-à-vis shareholders must be designed and implemented.
Acknowledgments
We are extremely grateful to two anonymous referees for their comments and suggestions. Usual disclaimers apply.
A.1 Bonus Incentive Weight and Manager Utility
In this section, we show that manager utility is always increasing in the bonus incentive weight, hence managers always prefer higher incentives on sales, which increase as managers are more powerful vis-à-vis shareholders in bargaining over managerial contracts. This demonstration follows the logic adopted by van Witteloostuijn, Jansen, and Van Lier (2007, p. 899), but it is made more elaborated by the fact that wages (marginal production costs) are endogenous in our framework.
According to the first-order equation
Finally, by taking Eq. (18) and the corresponding one for w j into account, we obtain:
A.2 Graphical Representation of Lemma 1
Firm profits: left box, α = 0 (take-it-or-leave-it); centre box, α = 0.5; right box, α = 1
Consumer surplus: left box, α = 0 (take-it-or-leave-it); centre box, α = 0.5; right box, α = 1
Union utility: left box, α = 0 (take-it-or-leave-it); centre box, α = 0.5; right box, α = 1
Social welfare: left box, α = 0 (take-it-or-leave-it); centre box, α = 0.5; right box, α = 1
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Supplementary Material
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