We study the production decisions of managers in an experimental Cournot market as a function of the incentive structure and the ownership structure of the experimental firms. This trial is related to a previous trial (AEARCTR-0006817).
In our experiment, there are two firms, managed by two managers and owned by two shareholders. Managers choose production quantities. The price in the market depends on the total production of both firms. Subjects play the experiment for multiple rounds.
Shareholders initially own 100% of one of the firms each (divided ownership). During the experiment, they have the option to exchange half of their shares so that they each own 50% of both firms. The shareholders incentives change with the ownership. If they each own shares in only one firm, they are best off when their manager produces the Cournot duopoly quantity. If they each own shares in both firms, they are best of when their manager produces halve of the monopoly quantity. Overall shareholder profits are higher if both managers produce halve of the monopoly quantity than if both produce the Cournot duopoly quantity.
Shareholders also have the opportunity to incentivise managers. The incentivisation options differ between the two treatments we run. In treatment 1, shareholders can choose incentive contracts before the managers make their decision. In treatment 2 shareholders can voluntarily pay a bonus after observing the managers choice.
The study has 3 primary objectives. First, we want to find out if managers correctly respond to incentives. In the treatment with ex ante incentives that means that they choose the quantity that maximises their payoff given the selected incentive contract. In the treatment with ex post bonus payments this means that they are more likely to produce the same amount as in the last round if they received a large bonus and more likely to produce a different amount if they received a small bonus payment.
Second, we want to find out if shareholders choose incentives that align the managers interest with their own interest given the current ownership structure, by choosing the correct incentive contract in treatment 1 and by paying a higher bonus if managers choose the optimal quantity in treatment 2.
Third, we want to find out if shareholders choose to exchange shares in order to be in a position where it is in their mutual best interest to incentivise managers to produce halve the monopoly quantity, which in turn maximises their profit.
We will recruit 200 subjects per treatment for a total of 400 subjects.