Managerial Effrt Incentives and Market Collusion管理努力的激励与市场合谋

1、managerial effort incentives and market collusionccile aubertuniversity of bordeaux (gretha)and toulouse school of economics (lerna)cleen workshop june 13, 2008main idea the objectives of owners and those of decision-makers within a firm may not be aligned. obtaining high profits without “misbehavin

2、g” (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 enforcemen

3、t?introduction model benchmarks managers antitrust conclusioninternal conflicts of interests fraud 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 an

4、d 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 conclusionsome issues in cartel deterrence1.new versions of leniency prog

5、rams (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 i

6、s 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 conclusionsome issues in cartel deterrence2. aubert, rey and kovacic

7、 (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.

8、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 conclusionsome literature on managerial incentives and collusion spagnolo (2000,

9、 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 conduc

10、t and effort incentives moral hazard on two variables.introduction model benchmarks managers antitrust conclusionoutline1.the model2.benchmarks3.managers incentives under asymmetric information4.antitrust instruments5.conclusionremark: abstract from moral considerations, and from coordination issues

11、 between firms.introduction model benchmarks managers antitrust conclusion1. 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

12、, 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 conc

13、lusionthe 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: af

14、ter 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 conclusionpr

15、ofits 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 =

16、0.(e.g., effort affects fixed costs).the model: profitsintroduction model benchmarks managers antitrust conclusionthe 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 man

17、agers 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 ( cand sustainable ifpersonal liability the profitability of collusion.0)(1ufmssmdintroduction model benchmarks managers antitrust conclusion

18、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 opp

19、ortunities (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:*)(1)*(ewem)*(1meintroduction model benchmarks managers antitrust conclusionbenchmark: unobservable market conduct as and e are observable, so is k. under collusio

20、n, 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 benchma

21、rks managers antitrust conclusion3. 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

22、 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 if01)(1)(mmmmewjewintroduction model benchmarks managers antitrust conclusionmanagers incentives: inducing collusion (2) to prevent informa

23、tion 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.jewmm)(introduction model benchmarks

24、managers antitrust conclusionmanagers 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

25、, u = 0 otherwise. participation constraint + incentive compatibility constraint (we neglect here incentives to deviate):)(1()()()1(1(:)(:upeewicewpcmcccccintroduction model benchmarks managers antitrust conclusioninducing competition (2)if the incentive compatibility constraint (ic) does not bind,

26、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

27、 )introduction model benchmarks managers antitrust conclusion)( )1 (1)1)(1 (1)( mccee4. 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 i

28、nduce 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 t

29、he manager for individual liability when deviation).introduction the model benchmarks managers antitrust conclusionwhistleblowing 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

30、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 eas

31、ily justifiable as “in the interests of the firm”.)1 (1)(),min(rfrfrfumssmdintroduction the model benchmarks managers antitrust conclusiondirect 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 attractiv