Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 235: Shareholder-Value Maximization and Tacit Collusion

Giancarlo Spagnolo
Additional contact information
Giancarlo Spagnolo: Dept. of Economics, Stockholm School of Economics, Postal: P.O. Box 6501, SE-113 83 Stockholm, Sweden

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.

JEL-codes: D43; G30; J33; L13; L21

35 pages, First version: May 7, 1998. Revised: November 29, 1998. Earlier revisions: November 11, 1998.

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Fortchoming as
Giancarlo Spagnolo, 'Shareholder-Related Compensation and Product-Market Competition', RAND Journal of Economics

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