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Cartel deterrence and manager labor market in US and EU antitrust jurisdictions: theory and experimental data

Author

Listed:
  • Miguel A. Fonseca

    (Department of Economics, University of Exeter and NIPE, Universidade do Minho)

  • Ricardo Gonçalves

    (Universidade Católica Portuguesa, Católica Porto Business School and CEGE)

  • Joana Pinho

    (Universidade Católica Portuguesa, Católica Porto Business School and CEGE)

  • Giovanni Tabacco

Abstract

We explore the consequences to contract design if firm shareholders are intent on their managers engaging in price exing activities under different legal regimes. We show that in fine-only legal regimes, optimal contracts must have a fixed wage. In contrast,in fine-plus-prosecution legal regimes optimal contracts must be high-powered,involving a variable component. We test these predictions in a laboratory experiment. We observe contract choices of firm owners, for a given legal regime, as well as the likelihood of managers forming explicit cartels and coordinating on prices in an indefinitely repeated Bertrand oligopoly, taking contract and legal regime as given. The data show that prosecuting managers leads to lower collusion, but high-powered contracts do not incentivize cartel formation or price coordination effectively, irrespective of legal regime. Nevertheless, high-powered contracts were most frequently chosen by firm owners, often with collusive intents.

Suggested Citation

  • Miguel A. Fonseca & Ricardo Gonçalves & Joana Pinho & Giovanni Tabacco, 2020. "Cartel deterrence and manager labor market in US and EU antitrust jurisdictions: theory and experimental data," Working Papers de Economia (Economics Working Papers) 02, Católica Porto Business School, Universidade Católica Portuguesa.
    • Handle: RePEc:cap:wpaper:022020
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    References listed on IDEAS

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    More about this item

    Keywords

    Straight Bonds; cartel formation; antitrust; managerial compensation; experiment.;
    All these keywords.

    JEL classification:

    • L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

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