Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies

Abstract

The instability of Cournot cartels can be overcome by a collective wage agreement if this agreement stipulates minimum fixed wages and piece rates that are legally enforceable. This new view on the institution of collective wage agreements is not only relevant for strategic management, it also has an important implication for economic policy: competition authorities should observe such agreements for their potentially collusive effect on product markets. Moreover, the model contributes to the explanation of the "fixed wage puzzle", i.e., the observation that firms pay lower than efficient variable wages and higher fixed wages than predicted by contract theory.