Motivating collusion

Abstract

We examine how executive compensation can be designed to facilitate product market collusion. We look at the 2013 decision to close several regional offices of the U.S. Department of Justice, which lowered antitrust enforcement for firms located near these closed offices. We argue this made collusion more appealing to 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 longer vesting periods, which provides long-term incentives that could foster collusive arrangements.