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Managerial incentives and collusive behavior

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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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  • Spagnolo, Giancarlo, 2005. "Managerial incentives and collusive behavior," European Economic Review, Elsevier, vol. 49(6), pages 1501-1523, August.
    • Handle: RePEc:eee:eecrev:v:49:y:2005:i:6:p:1501-1523
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    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - 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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