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

In the context of asymmetry of information between firms' owners and their managers, we investigate the use of incentive contracts as strategic variables in a duopoly with a public and a private firm. By giving the public manager an incentive scheme based on a linear combination of profit and sales revenue, we show that welfare can be improved. Furthermore, we show that the government should not privatize the public company.