Stock-Related Compensation and Product-Market Competition
Volume: Volume 31, No. 1
Issue: Spring 2000
Pages: pp. 22-42
Authors: Giancarlo Spagnolo
Title: Stock-Related Compensation and Product-Market Competition
Abstract: I show that as long as the stock market has perfect foresight, profits are distributed as dividends, and incentives are paid more than once or are deferred, stock-related compensation packages are strong incentives for managers to support tacit collusive agreements in repeated oligopolies. The stock market anticipates the losses from punishment phases and discounts them on stock prices, reducing managers' short-run gains from any deviation. When deferred, stock-related incentives may remove all managers' short-run gains from deviation, making collusion supportable at any discount factor. The results hold with managerial contracts of any length.
JEL Classification
Market Structure, Firm Strategy, and Market Performance: Oligopoly and Other Imperfect Markets; monopolistic competition; contestable markets
(L130)
Personnel Management; executive compensation (M120)
Payout Policy (G350)
Market Structure, Firm Strategy, and Market Performance: Monopoly; Monopolization Strategies cartels; collusion (L120)