Production-location decision under duopoly with managerial incentives

Abstract.

The validity of the profit-maximizing assumption has long been doubted by many economists. One reason for the deviation from profit maximization that has been emphasized is the separation of ownership and management. This paper attempts to examine the spatial consequences of this separation under duopoly where managers compete in quantities, as in the Cournot model, and owners choose their managers' incentives and plant locations. A complete analysis, including the exclusion theorem, comparisons of optimal locations under the incentive equilibrium with those under profit-maximization, and comparative statics, is provided. It is demonstrated that the separation of ownership and management has significant implications for firms in relation to their location decisions.