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Managerial Incentives and Collusive Behaviour

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Author Info
Spagnolo, Giancarlo

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

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Find related papers by JEL classification:
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
G30 - Financial Economics - - Corporate Finance and Governance - - - General
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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  1. Timothy L. Sorenson, 2007. "Credible collusion in multimarket oligopoly," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 115-128. [Downloadable!]
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