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Managerial Incentives and Collusive Behaviour

  • Spagnolo, Giancarlo

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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