UC Berkeley

Given potential abuse, conflicts of interest, and other issues, why do companies routinely pay for their managers to entertain the managers of other firms and allow their own managers to be so entertained? An answer that such practices facilitate interfirm cooperation is incomplete because it fails to address why companies cannot or do not induce such cooperation directly via their own ncentive systems. This article addresses these issues. It shows, inter alia, that even when firms can induce cooperation via their own incentive systems, they will do better obtaining that cooperation via cross-firm entertaining and other favor granting. This remains true even if "entertainment" budgets are subject to corruption, including excessive use or potential embezzlement. Furthermore, the results are wholly independent of any favorable tax treatment such practices may receive. (JEL D82, D86, L14, L24, M52.)