Relative performance evaluation of management. The effects on industrial competition and risk sharing

This paper shows that the use by firms in an oligopolistic industry of relative performance measures to evaluate their managers, may cause a conflict between the objectives of risk sharing and the implications for strategic competition derived from such performance measures, specially if firms compete in prices. We also show that if managers are risk neutral, the Stackelberg leader follower solution is among the multiple subgame perfect equilibria to the problem of strategic output competition; therefore relative performance evaluation of managers provides a mechanism to implement such solution. © 1992.