Inefficient Intra-Firm Incentives Can Stabilize Cartels in Cournot Oligopolies.

The paper demonstrates that the inherent instability of Cournot car-tels can be overcome by collective wage agreements if these agreements are legally enforceable. The parties have to agree upon linear contracts with minimum variable and fixed wages. Beyond its relevance for strategic management, this insight has an implication for economic policy: competition authorities should observe collective wage agreements for their potential collusive effect on product markets. Moreover, the model offers a new explanation for 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