Managerial Effort Incentives and Market CollusionCcile AubertUniversity of Bordeaux (GREThA)and Toulouse School of Economics (LERNA)CLEEN Workshop June 13, 2008挥娘爽仑迭扁罕组世等倡哺园哥待秀舒睦伟雌窃系早鬼秤痛乔詹鹿匝凿茂Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Main ideaThe objectives of owners and those of decision-makers within a firm may not be aligned.Obtaining high profits without “misbehaving” (e.g., colluding) requires more effort from managers (and high executives) which is costly.When effort is private information, managers may substitute effort and collusive behavior.Does this faciliate collusion? Can it be prevented by “honnest” shareholders?What impact for antitrust enforcement?Introduction Model Benchmarks Managers Antitrust Conclusion独币兽毙告杏金奖张手官垂欣已官皿槽仓蹄凳梅梆瞧眼枣且谗灾搁汤弦嘿Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Internal conflicts of interestsFraud is widespread even at top level (cf. Price Waterhouse Cooper, 2008).-Shareholders cannot fully control top executives;-Yet they may also be able to induce misbehavior with highly demanding targets and incentive wages.This applies to many types of misbehavior, including collusion.Impact for cartel deterrence and liability? Examine the impact of antitrust tools along the way.Introduction Model Benchmarks Managers Antitrust Conclusion胡娩祥碌沟场呛势梅窍胞挟涛菌组甥制禽原旬幻伙氧柱淳颜砧羌盗熬老股Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Some issues in cartel deterrence1.New versions of Leniency Programs (LP) (1993 in the US, 1996, 2002 and 2006 in the EU): apparently quite successful.LPs distinguish corporate and individual leniency. Most of the economic literature has focused on corporate LPs (e.g., Motta and Polo, 2003, Spagnolo, 2004, Aubert, Rey and Kovacic, 2006, Harrington, 2008,).What is the exact role of an individual LP?In the US, the use of effective internal compliance programs grants a reduction in liability.One must open “a little” the black box of the “firm”.Introduction Model Benchmarks Managers Antitrust Conclusion偏背耍寐朗皋它柬娜燕蜘贝薪淖匆碗叼哄议酣盐断气券背晓烧峦愁磕孽贵Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Some issues in cartel deterrence2. Aubert, Rey and Kovacic (2006) suggest rewards for informed employees reporting evidence as to collusion. What if the informed employee is the decision-maker? Perverse incentives?3.Desirability of jail sentences? Traditionally viewed as inefficient by economists, although some practitioners see them as quite effective (e.g., Hammond, 2005). Wills (2006).4.Is managerial disqualification (as imposed in the UK) useful (given that managers in colluding firms may be compensated for this risk?).Introduction Model Benchmarks Managers Antitrust Conclusion糖娘讨真堕盐沼审肆砒替地倦嗓眶迄汉袭篱峦功洋听庞沸吮窘尔瑚瞒憎竞Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Some literature on managerial incentives and collusionSpagnolo (2000, 2005) has shown how particular, usual, incentive schemes for managers (stocks, bonus plans, etc.) can help sustain collusion even at very low discount factors.Chen (2008) studies how delegation to an agent can improve a cartels sustainability.Here, different issue: interplay between market conduct and effort incentives moral hazard on two variables.Introduction Model Benchmarks Managers Antitrust Conclusion隔惯涡瞒缨诉院遗韩殷概蛆错有家爬陶曙悟相茶夯上猖波薯参差换霹鳃让Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Outline1.The model2.Benchmarks3.Managers incentives under asymmetric information4.Antitrust instruments5.ConclusionRemark: abstract from moral considerations, and from coordination issues between firms.Introduction Model Benchmarks Managers Antitrust Conclusion帕致龋赡奖惺唇价误炼益憾灭磐硷搏钓位赔浚粱敏售烃主锋呐碾叉诣茂残Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋1. The modelN firms are on the same market.In each firm, shareholders offer a (non observable) incentive wage w to a manager (or top executive).In each period, the manager privately chooses-the firms market conduct K (K = C, M, D),-and his own effort e (e in 0,1). Effort e costs him a disutility (e) (.) strictly convex).The manager can quit in any period few punishment opportunities. Penalty P if antitrust intervention and shareholders can prove managerial misbehavior?Introduction Model Benchmarks Managers Antitrust Conclusion淬淮牛厂萌献耗乞涤钠士辱利胳熊呕更销夹蛮勋供趋赔丁甥蔬央从凶屑柜Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋The model: TimingIn each period,1. Managers first choose whether to meet and communicate on to a collusive agreement (if one refuses, competition). Communication leaves evidence.2. Each manager is free to implement the collusive agreement, or deviate. He chooses market conduct and effort.A: after a deviation, all firms revert to competition forever (harshest possible punishment).The game is repeated infinitely.Discount factor: for managers, s for shareholders(if managers stay for short periods, incentive issues are reinforced).Introduction Model Benchmarks Managers Antitrust Conclusion酉净勤跑痴朴惭段裂阮爸烧叠殃梭涤移藩聘痴隆要淳特究导噬揖异顿舞盏Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Profits strictly in e and are-K(e) if all firms have chosen the same K,-K(e), for K=M,D, if one of the other firms has chosen D.If several firms deviate, competition: D(e) = C(e).One has D(e) M(e) C(e) (= D(e) M(e).Special case: No direct interaction between effort and collusion K = e + Kwith D M C = 0.(e.g., effort affects fixed costs).The model: ProfitsIntroduction Model Benchmarks Managers Antitrust Conclusion粒枢鸡员捆尽艘马桓滥惋沂朋硅聪香厕狮嗓壕葵亿柴壤纠窖秸秘斗凳寻厨Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋The antitrust authority (AA) investigates and finds evidence of collusion with probability .AA imposes a fine F on convicted firms, and possibly a personal fine or jail sentence J on managers in convicted firms (if personal liability).It can also offer-reduced penalties f ( F) to corporate informants in a corporate Leniency Program (LP) and j ( C and sustainable ifPersonal liability the profitability of collusion.Introduction Model Benchmarks Managers Antitrust Conclusion孺遥喳吾郎权瞳账垄潘试米堵聪题拿推蕊屹遵氏目酸贡萌绞呼猫夯抑鸦揍Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Benchmark: Unobservable effort and K are observable so is e.Shareholders want competition: No incentive issue.Shareholders want collusion: Incentive issue = “false deviation from others”: the manager gains in the short run (if small) by choosing e s.t. e + M = e* = (e*,M).Here limited punishment opportunities (0 at most). A colluding firm should pay an information rent: w w* = (e*), with w s.t. Extra cost of collusion in each period:Introduction Model Benchmarks Managers Antitrust Conclusion展嚼锚丘避习卑游殆凹晶答栽浦颓财碾咳决四形累淳豹棵卖横抉滴砾牛窜Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Benchmark: Unobservable market conductAs and e are observable, so is K.Under collusion, shareholders must compensate the agent in case of individual liability, as under full information. In the absence of moral hazard with respect to effort, moral hazard w.r.t. collusion decisions has no impact (this might not hold if non-deterministic link between and K). Introduction Model Benchmarks Managers Antitrust Conclusion颇史瓮党很麦氏挖奶纺直殿烙或面央块叉熟仅构奢赶忿戊璃唁四侯卸泛桃Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋3. Managers incentives under moral hazardA: both K and e are private information of the manager.Case 1: shareholders want to induce collusion:The logic of incentive constraints is similar to the benchmark cases: the manager must exert additional effort if he competes instead of colluding.If there is individual leniency (and legal protection so P =0 then), an incentive constraint arises:A manager would report his information ifIntroduction Model Benchmarks Managers Antitrust Conclusion相敏窿肘岛滇莆萨桔瘁婚辙翅蔑转帖篇以准歌宴兆驱验隔又丁埂惋乡默蹋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managers incentives: Inducing collusion (2)To prevent information reports, shareholders should offer which is benchmark wage (information rent).If in addition managerial disqualification, should be replaced by u = (1 ). Individual leniency and managerial disqualification are complements and make collusion less profitable.Introduction Model Benchmarks Managers Antitrust Conclusion票凳骚栅坷言衙唱忆醛府险玉携耐哄宾捌遗诞竹额夺堵吾与嫩星恐崎龟坯Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managers incentives: Inducing competition (1)Case 2: shareholders want to induce competition:The manager can save on effort by colluding instead.But if antitrust intervention, penalty P from shareholders, and J if individual liability. Let u = J with individual liability, u = 0 otherwise. Participation constraint + incentive compatibility constraint (we neglect here incentives to deviate):Introduction Model Benchmarks Managers Antitrust Conclusion倡镍洁固峭盗贮砍颂宽翘溉弛凹忻影礁庭贩皑辽袱猛燎纺酬裤桔萤焰竖蚀Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Inducing competition (2)If the incentive compatibility constraint (IC) does not bind, eC = e*, and moral hazard has no cost.This is more likely if P large, and if there is individual liability with J large.If the IC is more stringent than participation, shareholders eC to the gain of misbehaving: eC e*.Due to double moral hazard, competition becomes less efficient: (note that eC with )Introduction Model Benchmarks Managers Antitrust Conclusion汽颁估笆戮井贡折囤词猾宪袁订篮老稀卵洛否据建酱夸兜匹汛仗放蝎辐辈Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋4. Antitrust instrumentsShareholders choice: Compare collusive profits with competitive profits, and check sustainability.When managers have incentives to collude rather than compete, the lower effort necessary to induce competition makes collusion more attractive.Individual liability-makes it more likely that competition is efficient,-and increases the costs of collusion.Leniency programs reinforce incentives to deviate-directly (corporate version)-but also via managerial compensation (no need to compensate the manager for individual liability when deviation).Introduction The model Benchmarks Managers Antitrust Conclusion芋痉糖妒粮耻厢烩蜕圆四手场涧鸳噬犬诽循扮铂蓉到诵超剧榜眯鸽朵唱怕Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Whistleblowing programsUnder collusion: Impact even under full information on e and K:w = (e*) + r(1 ) with r = antitrust bonus to informants.If the firm deviates, the manager will ask for the full reward r ( complementarity LP / WP as shareholders will not pay r if deviation + LP).Let u = f if LP, u = F otherwise.Collusion is sustainable ifUnder competition: Perverse incentives if asym. information on K? Limit rewards size?Reputation issues. Denouncing is highly visible + not easily justifiable as “in the interests of the firm”.Introduction The model Benchmarks Managers Antitrust Conclusion寝败妙屹帘抵围灵碱祖眺羚殊工缀竖枪巴互肮鸿硷迢童九抗磋兽购朱琼僧Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Direct interactions between effort and collusionWe have seen an interplay between effort and market conduct even when they are technically independent.If the impact of effort increases with quantities, effort incentives make deviations more attractive.To induce collusion, shareholders must induce a lower effort. The costs of collusion entail lower efficiency.This technical interdependence is more favorable to cartel deterrence than the one studied here. The main effects highlighted remain however.Introduction The model Benchmarks Managers Antitrust Conclusion牟淄颤霉秀涅蓉辩诈俗忧扬攘埂炒怂蛋加辗衬迎燎广避苟蚁触邯蒋愉滔汾Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋ConclusionIndividual liability and more frequent antitrust intervention both improve cartel deterrence and internal incentives with competition.Individual leniency has an ambiguous impact.Managerial disqualification is beneficial when coupled with individual leniency. And managers convicted of collusive behavior should not be allowed to receive golden parachutes.Whistleblowing programs may raise new incentive issues, yet reputation concerns are likely to mitigate these (as well as the efficiency of the WP).Longer employment duration facilitates both collusion and efficient competition.Employees may not quite know what is illegal (compliance programs?).Introduction The model Benchmarks Managers Shareholders Conclusion抱兴合秀准绥秩囚悔勿静缉远烽侥势诊勘淤捐喇庙狙调啤阔土吼湾钮讥沮Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋