Working Paper BETA #2007-26

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Title : Relative Performance Evaluation, Risk Aversion and Entry

Author(s) : Jean-Daniel Guigou, Bruno Lovat, Gwenaël Piaser

Abstract : We study the relations between compensation schemes and risk aversion of managers in a strategic framework. We first show that the use of relative performance evaluation (RPE) in compensation contracts reduces the equilibrium profits of Cournot firms if managers are not too risk averse. Second, we introduce entry issues in our model. We then show that forbidding RPE can favour competition.

Key-words : Executive Compensation, Relative Performance Evaluation, Moral Hazard, Market Structure

JEL Classification : D43, D82, D86