Working Paper: CEPR ID: DP4506
Authors: Giancarlo Spagnolo
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.
Keywords: collusion; corporate governance; delegation; earnings management; executive compensation; income smoothing; oligopoly; ownership and control
JEL Codes: D43; G30; J33; L13; L21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| managerial incentives (M52) | collusion (D74) |
| income smoothing (D15) | collusion (D74) |
| capped bonus plans (M52) | collusion (D74) |
| incumbency rents (R21) | collusion (D74) |
| managerial incentives (M52) | defection from collusion (D74) |
| defection from collusion (D74) | collusion sustainability (D74) |
| managerial incentives (M52) | collusion sustainability (D74) |
| cyclical behavior of collusive prices (D43) | managerial incentives (M52) |