Ownership, Control and Collusion

SSE Working Paper in Economics and Finance No. 139

40 Pages Posted: 21 Apr 1999

See all articles by Giancarlo Spagnolo

Giancarlo Spagnolo

University of Rome Tor Vergata; EIEF; Centre for Economic Policy Research (CEPR); Stockholm School of Economics (SITE)

Date Written: December 1998

Abstract

The paper considers how the separation between ownership and control affects product-market competition in mature (repeated) oligopolies. It finds that as long as managers have a preference for smooth profits, as revealed by the empirical evidence on "income smoothing," by delegating control owners can sustain any tacit collusive agreement at lower discount factors. Common "low-powered" managerial incentives with monetary bonuses or incumbency rents make the joint monopoly collusive agreement supportable at any discount factor. The low pay-performance sensitivity for CEOs found by Jensen and Murphy (1990) and Kaplan (1994) is then "optimal," it maximizes firms' (collusive) profits. It is also shown that when managers are in control price wars during booms need not occur; the most collusive price may instead be pro-cyclical.

JEL Classification: D43, G30, J33, L13, L21

Suggested Citation

Spagnolo, Giancarlo, Ownership, Control and Collusion (December 1998). SSE Working Paper in Economics and Finance No. 139, Available at SSRN: https://ssrn.com/abstract=149776 or http://dx.doi.org/10.2139/ssrn.149776

Giancarlo Spagnolo (Contact Author)

University of Rome Tor Vergata ( email )

Faculty of Economics - DEF
Via Columbia 2
Rome, RM 00133
Italy

EIEF ( email )

Via Due Macelli, 73
Rome, 00187
Italy

HOME PAGE: http://WWW.EIEF.IT

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stockholm School of Economics (SITE) ( email )

P.O. Box 6501
Stockholm
Sweden

HOME PAGE: http://https://sites.google.com/site/giancarlospagnoloshomepage/

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