Managerial delegation, network externalities and loan commitment

Abstract

In this paper, we show that, compared with no network externalities, firms always obtain higher profits and social welfare in the presence of positive network externalities, irrespective of the managerial delegation contracts. Furthermore, we show that whether the owner chooses market share delegation or sales delegation contracts relies on the type and strength of network externalities. If the network externalities are positive and strong enough, sales delegation dominates the market share delegation; otherwise, the owner will choose market share delegation. More importantly, we find that, if the network externalities are positive, the optimal interest rate of a loan commitment decreases with an increase of network externalities, and the firm's delegation behavior will benefit society regardless of the delegation contract types. On the contrary, the optimal interest rate increases with an increase of network externalities, and the firm's delegation behavior will harm social welfare in the presence of negative network externalities.