Keywords: Multidivisional, incentives, managers
Abstract: The strategic choice of managerial incentives is studied in a multi-agent setting using a two-stage game. In the first stage, the principal chooses incentive schemes. Then, agents make their decisions. The game models the structure of multidivisional firms; divisions (agents) are managed independently, but the general office (principal) monitors their performance and provides incentives. It explains the rationale for establishing either cooperation or competition across divisions if firms face Cournot competition. If divisions are linked because of technological reasons (positive spillovers) cooperation should be stimulated. If they sell substitute products (negative spillovers) competition is needed.