Relative Performance Evaluation, Sabotage and Collusion

56 Pages Posted: 31 Mar 2020

See all articles by Matthew J. Bloomfield

Matthew J. Bloomfield

The Wharton School of the University of Pennsylvania

Catarina M. P. Marvão

Technological University Dublin; Stockholm School of Economics - Stockholm Institute of Transition Economics (SITE)

Giancarlo Spagnolo

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

Date Written: January 23, 2020

Abstract

Relative performance evaluation (“RPE”) is a useful tool for shielding risk averse agents from systematic uncertainty. However, RPE can also destroy firm value by encouraging executives to implement excessively aggressive product market strategies to improve their relative standing through costly sabotage. We posit that explicit collusion restricts a firm’s ability to engage in sabotage, thereby improving the net benefits of RPE. Consistent with this hypothesis, we document that: (1) cartel members are more likely to use RPE, especially in more concentrated markets; (2) conditional on using RPE, cartel members include more economically similar firms in their peer group; (3) firms are disproportionately likely to drop RPE from their executives’ pay package within one year of their cartel being dissolved by a plausibly exogenous intervention; and (4) RPE is associated with greater product market aggression, but only among non-cartel firms. Collectively, our evidence suggests that the potential for costly sabotage is an important deterrent to firms’ reliance on RPE, and that explicit collusion mitigates this effect, thereby facilitating more efficient risk-sharing.

Keywords: Compensation, Collusion, Cartels, Managerial Incentives, Relative Performance Evaluation, Sabotage

JEL Classification: D21, D22, D43, G30, G35

Suggested Citation

Bloomfield, Matthew J. and Marvão, Catarina Moura Pinto and Spagnolo, Giancarlo, Relative Performance Evaluation, Sabotage and Collusion (January 23, 2020). Available at SSRN: https://ssrn.com/abstract=3524522 or http://dx.doi.org/10.2139/ssrn.3524522

Matthew J. Bloomfield

The Wharton School of the University of Pennsylvania ( email )

1325 Steinberg-Dietrich Hall
3620 Locust Walk
Philadelphia, PA PA 19103-1724
United States
6073513042 (Phone)
6073513042 (Fax)

Catarina Moura Pinto Marvão (Contact Author)

Technological University Dublin ( email )

Dublin
Ireland

Stockholm School of Economics - Stockholm Institute of Transition Economics (SITE) ( email )

P.O. Box 6501
S-113 83 Stockholm, 11383
Sweden

Giancarlo Spagnolo

Stockholm School of Economics (SITE) ( email )

P.O. Box 6501
Stockholm
Sweden

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Rome 'Tor Vergata' ( email )

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

EIEF ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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

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