Motivating Collusion

We argue that executive compensation contracts can motivate product market collusion. We study two contract features: the use of relative performance benchmarking and the share of equity compensation in managerial pay. Relative performance evaluation is typically used to provide incentives for executives to outperform industry rivals but firms might strategically choose which rivals to consider. Meanwhile, decision makers with shorter horizons might deviate from collusive arrangements, making them unstable, while equity compensation can extend the horizon. We test this for U.S. firms over 2008-2017. Our identification comes from the 2013 decision to close the regional offices of the Department of Justice, which oversees antitrust enforcement. We find that firms located nearby the closed regional offices changed their executive compensation contracts by reducing the relative performance evaluation and extending their horizons.