Transaction costs in an agency theory of collusion

The traditional structure-conduct-performance analysis of collusion treats the firms involved as sole proprietorships. This dissertation addresses collusion in the corporate setting. When ownership and control is separated to some degree, a manager will only undertake activities that entail personal risk, if he personally will share in the return. The agency theory of collusion answers the question, why would a manager put himself personally at risk by engaging in a criminal conspiracy, when any monetary profits resulting from the conspiracy will accrue directly to the owners of the firm? According to the agency theory of collusion, the tighter a manager's fortune is bound to the performance of the firm (in terms of wealth, compensation, or promotion), the greater the likelihood that the manager will enter into a collusive agreement. Colluding managers form a team that reduces the risk borne by the team members of discipline from the owners of their firms for poor firm performance relative to the other firms in the industry. This team is sensitive to the existence of transaction costs between its members. The higher the rate of managerial turnover in the individual firms, the higher the transaction costs of reforming the collusive team after each change in management, and the less stable the team.;The dissertation outlines the principal-agent relationship with evaluation of management based on relative firm performance. It is shown that price fixing can reduce the risk of a critical evaluation by management. Even when the risk of criminal prosecution is considered, price fixing may still be a risk-reducing enterprise for managers. A noncooperative game is employed to demonstrate the benefits of managerial stability in resolving the prisoners' dilemma of collusion. The empirical results show that the agency and transaction cost factors are statistically significant and are able to predict nearly forty percent of the life spans of price-fixing conspiracies.;The advantage of this approach is that it relates the "conduct of the firm" directly to the incentives of the individuals engaged in making decisions for the firm, rather than to the structure of the industry.