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Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence From an Antitrust Experiment

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Author Info

  • Bigoni, Maria

    ()
    (University of Padua)

  • Le Coq, Chloé

    ()
    (SITE, Stockholm School of Economics)

  • Fridolfsson, Sven-Olof

    ()
    (Institutet för Näringslivsforskning (IFN) (Research Institute of Industrial Economics))

  • Spagnolo, Giancarlo

    ()
    (Università di Roma Tor Vergata)

Abstract

In this paper we investigate the effects of risk preferences and attitudes towards risk on optimal antitrust enforcement policies. First, we observe that risk aversion is negatively correlated with players’ proclivity to form a cartel, and that increasing the level of fines while reducing the probability of detection enhance deterrence. This confirms that the design of an optimal law enforcement scheme must keep risk attitudes into account, as suggested by Polinsky and Shavell. We also notice that players' ’propensity towards communication drops right after detection even if the collusive agreement was successful, and it declines as the sum of the fines paid by a subject increases. This effect could be explained by availability heuristic, –a cognitive bias, where people’s perception of a risk is based on its vividness and emotional impact rather than on its actual probability. Our results also confirm the crucial role of strategic risk considerations (analogous to risk dominance for one shot games) in determining the effects of leniency programs. Indeed, we show that the effectiveness of leniency programs in deterring cartels is mostly due to the increased risk of a cartel member being cheated upon when entering a collusive agreement, while the risk of a cartel being detected by an autonomous investigation of the Authority seems to play a less important role.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 696.

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Length: 22 pages
Date of creation: 22 Feb 2008
Date of revision:
Handle: RePEc:hhs:hastef:0696

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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Web page: http://www.hhs.se/
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Related research

Keywords: Collusion; Leniency; Experiments; Risk Aversion; Availability Heuristic; Strategic Risk;

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References

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  1. repec:hal:cesptp:halshs-00272928 is not listed on IDEAS
  2. Folkes, Valerie S, 1988. " The Availability Heuristic and Perceived Risk," Journal of Consumer Research, University of Chicago Press, vol. 15(1), pages 13-23, June.
  3. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  4. Timothy N. Cason & Lata Gangadharan, 2004. "An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement," Department of Economics - Working Papers Series 918, The University of Melbourne.
  5. Levitt, Steven D, 1998. "Why Do Increased Arrest Rates Appear to Reduce Crime: Deterrence, Incapacitation, or Measurement Error?," Economic Inquiry, Western Economic Association International, vol. 36(3), pages 353-72, July.
  6. Catherine C. Eckel & Philip J. Grossman, 2008. "Sex and Risk: Experimental Evidence," Development Research Unit Working Paper Series archive-09, Monash University, Department of Economics.
  7. Spagnolo, Giancarlo & Blonski, Matthias, 2001. "Prisoners' Other Dilemma," Working Paper Series in Economics and Finance 437, Stockholm School of Economics, revised 20 Feb 2001.
  8. Massimo Motta & Michele Polo, . "Leniency Programs and Cartel Prosecution," Working Papers 150, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  10. Pedro Dal Bo & Guillaume R. Frechette, . "The Evolution of Cooperation in Infinitely Repeated Games: Experimental Evidence," Working Papers 2007-7, Brown University, Department of Economics.
  11. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
  12. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  13. Anders Skrondal & Sophia Rabe-Hesketh, 2007. "Latent Variable Modelling: A Survey," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics & Finnish Statistical Society & Norwegian Statistical Association & Swedish Statistical Association, vol. 34(4), pages 712-745.
  14. Nuno Garoupa, 2003. "Behavioral Economic Analysis of Crime: A Critical Review," European Journal of Law and Economics, Springer, vol. 15(1), pages 5-15, January.
  15. Sapienza, Paola & Toldra Simats, Anna & Zingales, Luigi, 2007. "Understanding Trust," CEPR Discussion Papers 6462, C.E.P.R. Discussion Papers.
  16. Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October.
  17. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  18. Christine Jolls, 2007. "Behavioral Law and Economics," NBER Working Papers 12879, National Bureau of Economic Research, Inc.
  19. Jacquemet, Nicolas & Rullière, Jean-Louis & Vialle, Isabelle, 2008. "Monitoring optimistic agents," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 698-714, November.
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Cited by:
  1. Dietrich Earnhart & Lana Friesen, 2013. "Can Punishment Generate Specific Deterrence Without Updating? Analysis of a Stated Choice Scenario," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 56(3), pages 379-397, November.
  2. repec:dgr:uvatin:2008059 is not listed on IDEAS
  3. Søreide, Tina, 2009. "Too risk averse to stay honest?: Business corruption, uncertainty and attitudes toward risk," International Review of Law and Economics, Elsevier, vol. 29(4), pages 388-395, December.
  4. Jeroen Hinloopen & Adriaan Soetevent, 2008. "From Overt to Tacit Collusion," Tinbergen Institute Discussion Papers 08-059/1, Tinbergen Institute.
  5. Bigoni, Maria & Fridolfsson, Sven-Olof & Le Coq, Chloé & Spagnolo, Giancarlo, 2009. "Fines, Leniency and Rewards in Antitrust: an Experiment," CEPR Discussion Papers 7417, C.E.P.R. Discussion Papers.

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