Shareholder-Value Maximization and Tacit Collusion

This report demonstrates that so long as the stock market has ideal foresight, some dividends are distributed, and incentives are paid more than once or are deferred, stock-related pay packages are powerful incentives for managers to aid tacit collusive deals in repeated oligopolies. The stock marketplace anticipates the losses from punishment periods and discounts them on stock prices, decreasing managers’ short-run benefits from any deviation. When deferred, stock-related incentives might eliminate all managers’ short-run gains from deviation creating collusion supportable at any discount factor. The outcomes hold with managerial contracts of any length.

In a highly reviewed empirical study, Michael Jensen and Kevin Murphy (1990) demonstrated that until the end of the 80,s and contrary towards the forecasts of agency theory, U.S leading managers compensation had on typical a really low pay performance sensitivity.

Shareholder-Value Maximization and Tacit Collusion

Source: The Economic Research Institute

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