Common Ownership and Firm Strategic Behaviour

In our laboratory experiment two subjects in the role of managers will decide how much to produce in a Cournot market. The companies which they manage are owned by two subjects in the role of shareholders. Managers can choose to either produce the quantity that is the optimal choice under Cournot competition (33 in our experiment) or halve of the optimal monopoly quantity (25 in our experiment).
In the baseline treatment managers will receive a fixed salary and each shareholder will own 100% of one firm. We will have two forms of treatment interventions. First, we will vary the ownership and have treatments in which each of the two shareholders owns 50% of each firm. This changes the decision that maximises the shareholders’ profit. With divided ownership the shareholders only care about the profit of their firm and they want their managers to compete aggressively and produce the Cournot quantity. Under common ownership each shareholder is indifferent about which firm makes the profit so they would prefer if their managers behave like a monopolist and produce halve of the monopoly quantity.
Just because the ownership changes the incentives of the shareholders, this does not necessarily mean that managers adjust their behaviour to act in the shareholders’ interest. Incentives may be needed to change behaviour. In the baseline treatment mangers receive a fixed salary. In additional treatments managers will get either a share of their own firms profits or a share of both firms’ profit. The first should induce them to produce more, to maximise their own firms profit and the second should induce them to produce less to raise the combined profit of both firms.
This leads to 6 treatments which we are going to test initially
• Divided ownership, fixed salary
• Common ownership, fixed salary
• Divided ownership, incentives based on the profit of the own firm
• Common ownership, incentives based on the profit of the own firm
• Divided ownership, incentives based on the profit of both firms
• Common ownership, incentives based on the profit of both firms

We have plans for future treatments.
In those treatments we will
• Test if communication matters by allowing shareholders to either
o Choose between pre specified messages asking the managers to produce more, the same amount or less
o Allow managers to freely talk to managers
• Allow shareholders to choose the incentives of the managers

In addition to studying variation in the outcome measure that depends on our interventions, we may also examine if there are differences based on the demographics of the subjects (e.g. their gender). This analysis will be exploratory, and we do not have a prior hypothesis about any demographics related effects. We may also study the dynamics of the experiment by examining if subjects behave differently in different rounds of the experiment.

2020-11-25

2020-11-26

The primary outcome measure is the production choice of the manager.

We directly record the produced quantity from each manager. They can make a binary choice between producing 25 (halve of the monopoly quantity) and 33 (the Cournot quantity). We are interested in the share of managers that choses to produce 25 or 33 in each decision of each treatment. Subjects will complete 10 rounds and we will put a particular focus on their choice in the last round as this should be unaffected by any reputational or strategic concerns about future rounds of the experiment, that may influence the managers in earlier rounds.
Having just two options to choose from has the advantage that it produces unique equilibria with respect to both shareholder preferences and managers self interest in the two treatments that include performance incentives in the one-shot games. If managers are incentivised based on their own profit producing 33 strictly dominates 25 and if managers are incentivised based on the profit of both firms 25 strictly dominates 33. With common ownership the shareholders strictly prefer their manager to produce 25 and with divided ownership they strictly prefer the managers to produce 33. If Managers can choose production freely the optimal choice depends on their assumption of what the other manager will do and under common ownership / incentives based on the profit of both firms there are multiple Nash equilibria. We may nevertheless decide to use a setup where managers can choose production freely after pilots if the treatment effects are to small to pick up in a binary choice design with our planned sample size.

We will run a computerised experiment in which two managers decide how much of a good their firm produces. The price in the market depends inversely on the total production by both firms. Producing more will therefore raise the profit of the managers own firm but will decrease the profit of the other firm and the market as a whole. We are interested in the production decisions of the managers. We will start by running 6 treatments, which are described in detail in the “Intervention” section. In the treatments we will vary ownership and incentives of the manager. The experiment will be programmed using oTree and subjects complete the experiment in their web browser. We intend to recruit subjects via prolific, an online subject pool for academic and market research. We may also use subjects from amazons mechanical turk or run laboratory experiments in the future to validate our results in different samples. Each of the 6 treatments will have 200 managers and 200 sharehodlers for a total of 2400 subjects. Subjects will have the opportunity to earn additional compensation beyond their show up fee. The additional compensation depends on their salary (manager) or the firm’s profit (shareholder). We will select one of the 10 rounds which subjects play at random and pay subjects depending on the result from this round.

We will recruit different sessions and each session will be one treatment. All Sessions will be recruited from the same population and in a short time window.

experimental sessions

No

see below

Because our experimental paradigm and our research question are novel, so there is no guidance regarding what to expect behaviorally, and because the implementation of our experiment has not been tested yet, we start with 100 subjects per treatment and will reconsider the parameters and the implementation of our experiment in case initial results reveal flaws in our design. If we decide to change parameters or implementation then, we will make this transparent by an amendment to this preregistration

We plan that each treatment will have a sample size of 100 groups including 200 managers and 200 shareholders. As mentioned above we may change this after running pilot studies and we will update this pre-registration if we do so.