Strategic Delegation and Collusion: An Experiment

Abstract

The assumption that firms maximize profit has been widely used in economics to explain firm behavior and market outcomes. But the profit maximization assumption may lead to incorrect predictions when firms engage in strategic delegation between owners (e.g., shareholders) and managers (e.g., company executives) whose incentives may differ. This paper examines firms' collusion under the assumption that firms engage in strategic delegation versus profit maximization. The experiment incorporates cartel fines for firms' managers and owners to closely align with the United States antitrust regime. In addition, this study examines the effects of communication between firms on cartel formation under strategic delegation. The experiment yields three main findings: (i) strategic delegation does not increase the total number of cartels when communication is allowed but may increase implicit cartels when communication is not allowed; (ii) cartel formation occurs in two distinct ways, with firms simultaneously choosing a low output for collusion or periodically switching off between high and low outputs to evade cartel fines; and (iii) cartels are more likely to be formed when firms have different incentive schemes for managers instead of the same incentive schemes for managers across all firms.