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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 235:
Shareholder-Value Maximization and Tacit Collusion

Giancarlo Spagnolo

Abstract: This paper shows that as long as the stock market has perfect foresight, some dividends are distributed, and incentives are paid more than once or are deferred, stock-related compensation packages are strong incentives for managers to support tacit collusive agreements in repeated oligopolies. The stock market anticipates the losses from punishment phases and discounts them on stock prices, reducing managers' short-run gains from any deviation. When deferred, stock-related incentives may remove all managers' short-run gains from deviation making collusion supportable at any discount factor. The results hold with managerial contracts of any length.

Keywords: CEO compensation; tacit collusion; oligopoly; delegation; managerial incentives; ownership and control; corporate governance.; (follow links to similar papers)

JEL-Codes: D43; G30; J33; L13; L21; (follow links to similar papers)

35 pages, May 7, 1998, Revised November 29, 1998

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This paper is forthcoming as:
Spagnolo, Giancarlo, 'Shareholder-Related Compensation and Product-Market Competition', RAND Journal of Economics.



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