Do Managerial Incentives Facilitate Collusion?

Abstract: This paper investigates the impact of management incentives on firm cartels. It is usually the manager which acts on behalf of the owner and is running the firm. To mitigate the agency problem, the owner puts corporate governance mechanism in place, which incentivize managers to align their interest with that of the firm’s shareholders. While this is beneficial for the firm performance in the first place, the structure of these contracts might change the attraction of collusion for managers. Consequently, we analyze how manager remuneration schemes impact their incentives for collusion, cartel formation and stability. Exploiting different data sources allows us to identify the managers remuneration schemes and cartels within the United States. We find that higher long-term incentives of managers indeed affect collusion. Our analysis shows that a higher degree of manager's long-term incentives leads to (i) a higher probability of a firm's cartel participation, (ii) a higher probability of forming a cartel and (iii) no effect on the termination of a cartel.