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Managerial Incentives and Collusive Behaviour

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  • Spagnolo, Giancarlo

Abstract

I characterize the effects of empirically observed managerial incentives on long-run oligopolistic competition. When managers have a preference for smooth time-paths of profits – as revealed by the empirical literature on ‘income smoothing’ – manager-led firms can sustain collusive agreements at lower discount factors. Capped bonus plans and incumbency rents with termination threats make collusion supportable at any discount factor, independent of contracts’ duration. When managers have these preferences/incentives and demand fluctuates, ‘price wars during booms’ need not occur: the most collusive price may then be pro-cyclical. Corporate governance codes invoking transparency may reinforce these effects.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4506.

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Date of creation: Jul 2004
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Handle: RePEc:cpr:ceprdp:4506

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Keywords: collusion; corporate governance; delegation; earnings management; executive compensation; income smoothing; oligopoly; ownership and control;

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Cited by:
  1. Siegert, Caspar, 2014. "Bonuses and managerial misbehaviour," European Economic Review, Elsevier, vol. 68(C), pages 93-105.
  2. Artiga González, Tanja & Schmid, Markus & Yermack, David, 2013. "Smokescreen: How Managers Behave When They Have Something to Hide," Working Papers on Finance 1309, University of St. Gallen, School of Finance.
  3. E. Dargaud & A. Mantovani & C. Reggiani, 2013. "The fight against cartels: a transatlantic perspective," Working Papers wp894, Dipartimento Scienze Economiche, Universita' di Bologna.
  4. Ando, Munetomo & Kobayashi, Hajime, 2008. "Intergenerational conflicts of interest and seniority systems in organizations," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 757-767, March.
  5. Bian, Junsong & Lai, Kin Keung & Hua, Zhongsheng, 2013. "Upstream collusion and downstream managerial incentives," Economics Letters, Elsevier, vol. 118(1), pages 97-100.
  6. Timothy L. Sorenson, 2007. "Credible collusion in multimarket oligopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 115-128.
  7. Andreoli-Versbach, Patrick & Franck, Jens-Uwe, 2013. "Actions Speak Louder than Words: Econometric Evidence to Target Tacit Collusion in Oligopolistic Markets," Discussion Papers in Economics 16179, University of Munich, Department of Economics.
  8. Aubert, Cécile, 2009. "Managerial Effort Incentives and Market Collusion," TSE Working Papers 09-127, Toulouse School of Economics (TSE).
  9. Czerny, Achim & Höffler, Felix & Mun, Se-il, 2013. "Port Competition and Welfare Effect of Strategic Privatization," EWI Working Papers 2013-13, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  10. Johannes Paha, 2013. "The Impact of Persistent Shocks and Concave Objective Functions on Collusive Behavior," MAGKS Papers on Economics 201328, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  11. Rasch, Alexander & Wambach, Achim, 2009. "Internal decision-making rules and collusion," Journal of Economic Behavior & Organization, Elsevier, vol. 72(2), pages 703-715, November.

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