Ownership, Control and Collusion

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