Managerial Effort Incentives and Market Collusion
Abstract: We investigate the interactions between managers' incentives to collude or compete, and their 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 two-tasks moral hazard, owners may have to give the manager information rents, and to choose inefficient effort levels --- or profit targets. Because of this reduced internal efficiency, welfare losses may arise even when the industry remains competitive. Antitrust policy has a novel value, specifically from 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. All antitrust instruments make competition more attractive, and/or collusion less attractive, except for one: Individual leniency programs. The latter have ambiguous effects, even when not used in equilibrium.
