14 January 2014We investigate the effects of competition on managerial incentives and effort in a laboratory experiment. Each owner offers compensation to his manager in two different contexts: monopoly and Cournot duopoly. After accepting the compensation, the manager chooses an effort level to increase the probability of reduced costs of his firm. Theory predicts that the entry of a rival firm in a monopolistic industry affects negatively both the incentive compensation and the effort level. Our experimental findings confirm that the entry of a rival firm reduces the incentive compensation but not the manager’s effort level. However, despite the reduction of the incentive compensation, the manager continues to accept the contract offers and exert the same level of effort.