On the collusive nature of managerial contracts based on comparative performance

Abstract

We show that managerial delegation based upon comparative performance may generate collusive outcomes observationally equivalent to those typically associated with repeated games or cross ownership. This happens when rivals’ profits are positively weighted in the managerial incentive scheme. We also identify the level of time discounting at which a repeated game based upon Nash reversion would achieve the same degree of collusion. Accordingly, such managerial contracts should attract the attention of antitrust authorities.