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Short-Term Managerial Contracts Facilitate Cartels

Martijn A. Han

Humboldt University of Berlin

December 23, 2010

Amsterdam Center for Law & Economics Working Paper No. 2010-16

This paper shows how a series of commonly observed short-term CEO employment contracts improves cartel stability compared to a long-term contract. When a manager’s short-term appointment is renewed if and only if the firm hits a certain profit target, then (a) defection from collusion results in superior firm performance and thus reduces the chance of being fired immediately, while (b) future punishment results in inferior firm performance, thereby increasing the chance of being fired in the future. The introduction of this reemployment tradeoff intertwines with the usual monetary tradeoff and weakly improves cartel stability. Studying the impact of fixed versus variable salary components, I find that fixed components facilitate collusion with a short-term contract, while not affecting cartel stability with a long-term contract. I extend the model to argue how short-term renewable contracts are a source of cyclical collusive pricing. Finally, interpreting the results in the light of firm financing shows how debt-financed firms can form more stable cartels than equity-financed firms.

Number of Pages in PDF File: 33

Keywords: Cartels, Collusion, Managerial Contracts, Price Wars

JEL Classification: L10, L21, L40

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Date posted: December 24, 2010  

Suggested Citation

Han, Martijn A., Short-Term Managerial Contracts Facilitate Cartels (December 23, 2010). Amsterdam Center for Law & Economics Working Paper No. 2010-16. Available at SSRN: https://ssrn.com/abstract=1730209 or http://dx.doi.org/10.2139/ssrn.1730209

Contact Information

Martijn A. Han (Contact Author)
Humboldt University of Berlin ( email )
Unter den Linden 6
Berlin, Berlin 10099
HOME PAGE: http://www.martijnhan.com
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