Effects of impefect competition on contractual design in the presence of private information

The present work analyzes the effect of competition on managerial incentives when agents have private information about the firms' productivities. Two types of firms are considered: managerial firms (delegation) and entrepreneurial firms (no delegation). Due to the asymmetry of information managerial firms are less efficient (productive efficiency) than entrepreneurial firms and entrepreneurial firms competition may actually reduce the managerial firms' productive inefficiency. When a non-profit maximizing firm (managerial type) is present in the market, the net effect in terms of social welfare is ambiguous: if the number of competing firms is high enough to introduce a non-profit maximizer is not worthwhile since the extra cost in terms of informational rent is not outweighed by sufficiently high increase of the quantity produced. The non-profit maximizing firm introduces a trade-off between allocative efficiency and productive inefficiency. Under the assumption of imperfect correlation we show that expected social welfare is a decreasing function of the correlation degree between firms' productivities. Moreover managerial informational rents are larger when firms' productivities are positively correlated.