Motivating Collusion

Motivating Collusion

Authors

Sangeun Ha

Copenhagen Business School - Department of Finance

Fangyuan Ma

Chinese University of Hong Kong (CUHK) - Department of Finance; Peking Univeristy, HSBC Business School

Alminas Zaldokas

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Abstract

We examine how executive compensation can be designed to motivate product market collusion. We look at the 2013 decision to close several regional offices of the Department of Justice, which lowered antitrust enforcement for firms located near these closed offices. We argue that this made collusion more appealing to the shareholders, and find that these firms increased the sensitivity of executive pay to local rivals' performance, consistent with rewarding the managers for colluding with them. The affected CEOs were also granted more equity compensation, which provides long-term incentives that could foster collusive arrangements.