Comment on

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• Comment on
• Product Market Competition, Insider Trading
  Regulation, and optimal Managerial Contracts
• by Jyh-bang Jou Dec. 14. 2006

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• This article investigates how insider trading
  affects optimal managerial contracts in a
  framework where two firms compete in a
  Stackelberg (the first part) or a Cournot-Nash
  environment (the second part).

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• In the first part, an incumbent firm is
  risk-neutral and is operated by an owner-manager.
  The new entrant, which is owned by a
  risk-neutral entrepreneur, hires a manager who is
  risk averse. Besides, the incumbent does not
  face cost uncertainty, while the new entrant
  does. The incumbent firm is a leader, while the
  new entrant is a follower. Given the authors
  assumptions, the derived results are correct.

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• However, my concern is that the two firms are too
  dissimilar. They not only differ in their
  attitude toward risk, but also differ in the
  uncertainty they face. When speaking of product
  market competition, one presumably assumes that
  firms in the industry will be affected by the
  industry-wide uncertainty. However, the authors
  focus on the firm-specific uncertainty. The
  authors need to cite references to justify this
  assumption.

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• Alternatively, the authors need to discuss how
  this firm-specific uncertainty comes from.
  Furthermore, the authors need to justify why the
  incumbent firm is an owner-manager, and why only
  the new entrant faces the adverse selection
  problem. Again, the authors need to cite
  references to support their assumptions.

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• The second part of the article, which begins from
  page 22, assumes that two firms compete in a
  Cournot-Nash environment. The authors further
  assume that inactive agents and managers are risk
  neutral, while the hedgers are risk averse.
  Here, again, the authors need to justify their
  assumption by citing references. The predictions
  in this part are clearly stated.

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• However, I do have two concerns. First, it is
  unclear to me what is the major similarities and
  dissimilarities between this article and those of
  Subrahmanyam (1991) and Spiegel and Subrahmanyam
  (1992). Second, there are several complicated
  algebra shown in Lemmas and Corrollaries, which
  are associated with the theoretic predictions
  stated in Propositions 8 and 9. More assumptions
  may be added to simplify the algebraic
  expressions.

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• I also provide some minor comments page by page.
• 1. This article can be divided into two papers.
  As a result, the abstract part on pages 1 and 2
  can be shortened, e.g., less than one hundred
  words. Further, the authors may link their
  theoretic results smoothly without using the
  number (i), (ii),.

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• 2. On page 1, the term power is ambiguous.
  Throughout the paper, the authors can say that
  the compensation scheme includes a base salary
  and a bonus which is proportional to the firms
  profits. As a result, an increase in the power
  of the managerial scheme is equivalent to an
  increase in the bonus.

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• 3. On page 5, the term slope is too technical.
  Again, what the authors want to express is the
  bonus.
• 4. On page 6, the statement disproves Carlton
  and Fischels argument is too strong because
  one will expect to get different results when the
  authors employ different assumptions from those
  of Carlton and Fischels.

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• 5. On page 7, what is the meaning of orthogonal
  to?
• 6.On page 8, Our sixth result can be changed
  into Our sixth result shows that as demand is
  more favorable or more elastic, and productivity
  increases.
• 7. On page 8, the paragraph stating the
  relationship between financial leverage and
  insider trading restrictions can move to the
  concluding part.

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• 8. On page 10, explain the meaning of ? when it
  first occurs.
• 9. On page 11, equation (6) can be deleted. And
  then tell readers such that
  attains its maximum at .
• 10. On page 13, the theoretic prediction is
  restricted as its validity depends on the value
  of ? . As the term ? does not represent the
  coefficient of relative nor absolute risk
  aversion, the prediction of proposition 1 may
  become untestable.

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• 11. The premises for Proposition 5 on page 19 and
  for proposition 6 on page 21 to be valid are very
  complicated. More assumptions may be added to
  simplify these premises.
• 12. On page 29, they are trade should be
  replaced by they are trading.
• 13. On page 33, the theoretic prediction of
  Proposition 7 depends on the magnitude of A, and
  thus the use of this Proposition may be
  restricted.

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• 14. On page 40, the use of insider trading
  resembles the use of strategic debt in Brander
  and Lewiss article (AER, 1986)
• End of Comments.
• Thank you very much.