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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License
Article
Delegation and Firms’ Ability to Collude: Do Incentive Schemes Matter?
Author(s)
Patrick de Lamirande, Jean-Daniel Guigou, Bruno Lovat
Full-Text PDF
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DOI:10.17265/1537-1514/2013.01.007
Affiliation(s)
Patrick de Lamirande, Ph.D., Financial and Information Management, Cape Breton University.
Jean-Daniel Guigou, Ph.D., Luxembourg School of Finance, University of Luxembourg.
Bruno Lovat, Ph.D., BETA-REGLES, Institut des sciences humaines et sociales, Université de Lorraine.
ABSTRACT
Delegation is widely used by firms. Instead of dealing themselves with production decisions, owners delegate production to managers. If effects of delegation on collusion have been studied previously, the effect of incentive contracts on the sustainability of collusion is unclear. This paper introduces incentive schemes based on relative profits (RP) in the analysis of cartel stability when firms have the option to delegate production decisions to a manager. The approach followed similar to Lambertini and Trombetta (2002), where managerial utility functions prefer to combine profits and sales. When RP contracts are used, collusion between managers ceases to be independent of delegation and collusion between firm owners is harder to sustain. Also, if managers are not able to collude, the relationship between owners’ delegation decisions and their discount factor is non-monotonic, but the discontinuity occurs at higher discount factors relatively to what Lambertini and Trombetta found. Since with RP contracts the symmetric incentive solution is just one of a continuum of equilibria, the possibility of reverting to asymmetric incentive equilibrium in the punishment phase is considered. Overall, the results show that managerial incentive schemes do matter in firms’ ability to collude and if asymmetric punishments are used, then collusion becomes very likely.
KEYWORDS
strategic delegation, relative performance evaluation, cartel stability
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