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Klaus M. Schmidt, Managerial Incentives and Product Market Competition, The Review of Economic Studies, Volume 64, Issue 2, April 1997, Pages 191–213, https://doi.org/10.2307/2971709
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Abstract
The paper shows that an increase in competition has two effects on managerial incentives: It increases the probability of liquidation, which has a positive effect on managerial effort, but it also reduces the firm's profits, which may make it less attractive to induce high effort. Thus, the total effect is ambiguous.
I identify natural circumstances where increasing competition unambiguously reduces managerial slack. In general, however, this relation need not be monotonic. A simple example demonstrates that—starting from a monopoly—managerial effort may increase as additional competitors enter the market, but will eventually decrease when competition becomes too intense.
