Trust, Leniency and Deterrence

Posted by Social Science Research Network

Trust, Leniency and Deterrence – Maria Bigoni (University of Bologna – Department of Economics), Sven-Olof Fridolfsson (Research Institute of Industrial Economics), Chloe Le Coq (SITE-Stockholm School of Economics) and Giancarlo Spagnolo (Stockholm School of Economics)

ABSTRACT: This paper presents results from a laboratory experiment on the channels through which different law enforcement strategies deter cartel formation. With leniency policies offering immunity to the first reporting party a high fine is the main determinant of deterrence, having a strong effect even when the probability of exogenous detection is zero. Deterrence appears then mainly driven by ‘distrust,’ the fear of partners deviating and reporting. Absent leniency, the probability of detection and the expected fine matter more, and low fines are exploited to punish defections. The results appear relevant to several other crimes sharing cartels’ strategic features, including corruption and financial fraud.