Disclosure of Managerial Contract Information in a Vertically Related Market

Abstract

The observability of managerial contract information in duopolies with strategic delegation has been an issue of controversial discussion. In a recent paper, Baik and Lee (2019) endogenize the decision to disclose the details of managerial contracts and show that in equilibrium, the owners of both firms have an incentive to always voluntarily reveal contract information, independent if firms compete in quantities or prices. We study how voluntary disclosure of contract information is affected by the presence of a supplier that provides an input to both firms. We demonstrate that under quantity competition, a partial disclosure equilibrium may occur if product differentiation is low. Disclosing firms punish their managers for sales to soften supplier pricing. Mandating disclosure increases total welfare, but consumer surplus decreases. Under price competition, firms always want to disclose. Finally, firm profits can be higher under price competition than under quantity competition.