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Short-Term Managerial Contracts And Cartels, Martijn Han

Martijn A. Han

This paper shows how a series of commonly observed short-term CEO employment contracts can improve cartel stability compared to a long-term employment contract. When a manager's short-term appointment is renewed if and only if the firm hits a certain profit target, then (i) defection from collusion results in superior firm performance, thus reducing the chance of being fired, while (ii) future punishment results in inferior firm performance, thus increasing the chance of being fired in the future. The introduction of this re-employment tradeoff intertwines with the usual monetary tradeoff and can improve cartel stability. Studying the impact of fixed versus …