Incentive schemes as strategic variables: an application to a mixed duopoly

In a context of asymmetry of information between firms' owners and their managers, we investigate the use of incentive contracts as strategic variables in an oligopoly industry. Moreover, we consider that the government has the possibilityto intervene in the market by nationalizing an incumbent firm. In such framework a public firm can be used as an internal regulation mechanism . At the same time owners can use intrafirm contracting in a strategic way, taking advantage of the interaction among players. We conclude that government might have advantage in introducing a public firm in the market and if he does both firms' owners will always choose strategic contracts for their managers. Further, if firms decide on contracts sequentially we show that a private and a public firm would agree on the attribution of the leader role to the public firm.