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Managerial Effort Incentives and Market Collusion

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  • Aubert, Cécile

Abstract

We investigate the interactions between managers’ incentives to collude or compete, and incentives to exert effort. A manager privately chooses the competitive strategy of the firm, and his own effort to improve productivity; He may substitute collusion to effort to increase profits. High profit targets — i.e., strong effort incentives — make participating in a cartel more attractive. To answer this double moral hazard, owners may have to give the manager information rents, and to choose inefficient effort levels. This affects cartel sustainability and profitability. Because of reduced internal efficiency, welfare losses may arise even when the industry remains competitive. Antitrust policy has a novel value, specifically thanks to individual sanctions: They foster internal efficiency in competing firms while worsening it in cartelized firms. This improves both efficiency under competition and cartel deterrence. Individual fines are thus more beneficial than corporate fines; criminal sanctions are even more effective. Last, individual leniency programs have ambiguous effects, even when not used in equilibrium.

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Bibliographic Info

Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 09-127.

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Date of creation: Dec 2009
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Handle: RePEc:tse:wpaper:22250

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Keywords: collusion; managerial incentives; leniency programs;

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References

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  1. Rajesh Aggarwal & Andrew A. Samwick, 1996. "Executive Compensation, Strategic Competition, and Relative Performance Evaluation: Theory and Evidence," NBER Working Papers 5648, National Bureau of Economic Research, Inc.
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  6. Joseph E. Harrington, Jr, 2005. "Optimal Corporate Leniency Programs," Economics Working Paper Archive 527, The Johns Hopkins University,Department of Economics.
  7. Nathan H. Miller, 2009. "Strategic Leniency and Cartel Enforcement," American Economic Review, American Economic Association, vol. 99(3), pages 750-68, June.
  8. Aubert, Cecile & Rey, Patrick & Kovacic, William E., 2006. "The impact of leniency and whistle-blowing programs on cartels," International Journal of Industrial Organization, Elsevier, vol. 24(6), pages 1241-1266, November.
  9. Spagnolo, Giancarlo, 2004. "Managerial Incentives and Collusive Behaviour," CEPR Discussion Papers 4506, C.E.P.R. Discussion Papers.
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  14. Zhijun, 2008. "Cartel Organization and Antitrust Enforcement," Working Papers 08-21, Centre for Competition Policy, University of East Anglia.
  15. Spagnolo, Giancarlo, 2004. "Divide et Impera: Optimal Leniency Programmes," CEPR Discussion Papers 4840, C.E.P.R. Discussion Papers.
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Cited by:
  1. Jaideep Chowdhury, 2014. "Impact of financial constraint on incentive compensation and product market behavior," Economics Bulletin, AccessEcon, vol. 34(1), pages 115-124.
  2. 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).

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