A Note on Strategic Delegation: The Role of Decreasing Returns to Scale

We build a model of optimal design of managerial incentive schemes when the production technology exhibits decreasing returns to scale and firms compete a la Cournot. We borrow Fershtman and Judd (1987) and Krakel (2005) framework. We show how there is a dominant strategy for entrepreneurs to delegate output decisions. Results depend on the degree of diseconomies of scale. We demostrate how for a class of parameters, managers may increase profits through delegation, a result that with constant returns does not hold.