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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.

Suggested Citation

  • Aubert, Cécile, 2009. "Managerial Effort Incentives and Market Collusion," TSE Working Papers 09-127, Toulouse School of Economics (TSE).
  • Handle: RePEc:tse:wpaper:22250
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    References listed on IDEAS

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    1. Joseph E. Harrington, 2005. "Optimal Cartel Pricing In The Presence Of An Antitrust Authority," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(1), pages 145-169, February.
    2. Dan Bernhardt & Christopher P. Chambers, 2006. "Profit sharing (with workers) facilitates collusion (among firms)," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 483-502, September.
    3. repec:dau:papers:123456789/13637 is not listed on IDEAS
    4. Levenstein, Margaret & Suslow, Valerie Y. & Oswald, Lynda J., 2003. "Contemporary International Cartels And Developing Countries: Economic Effects And Implications For Competition Policy," Working Papers 14590, International Agricultural Trade Research Consortium.
    5. 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.
    6. Zhijun, 2008. "Cartel Organization and Antitrust Enforcement," Working Papers 08-21, Centre for Competition Policy, University of East Anglia.
    7. Cécile Aubert, 2007. "Instruments for Cartel Deterrence and Conflicts of Interests," Post-Print hal-00152689, HAL.
    8. Klaus M. Schmidt, 1997. "Managerial Incentives and Product Market Competition," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 191-213.
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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. Daniel Herold, 2017. "The Impact of Incentive Pay on Corporate Crime," MAGKS Papers on Economics 201752, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    3. Fabra, Natalia & Motta, Massimo, 2013. "Antitrust Fines in Times of Crisis," CEPR Discussion Papers 9290, C.E.P.R. Discussion Papers.
    4. 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).

    More about this item

    Keywords

    collusion; managerial incentives; leniency programs;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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