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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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Related research

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

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References

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  1. Motta, M. & Polo, M., 1999. "Leniency Programs and Cartel Prosecution," Economics Working Papers, European University Institute eco99/23, European University Institute.
  2. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, National Bureau of Economic Research, Inc, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  3. Nuno Garoupa, 2003. "Behavioral Economic Analysis of Crime: A Critical Review," European Journal of Law and Economics, Springer, Springer, vol. 15(1), pages 5-15, January.
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  5. Folkes, Valerie S, 1988. " The Availability Heuristic and Perceived Risk," Journal of Consumer Research, University of Chicago Press, University of Chicago Press, vol. 15(1), pages 13-23, June.
  6. Steven D. Levitt, 1995. "Why Do Increased Arrest Rates Appear to Reduce Crime: Deterrence, Incapacitation, or Measurement Error?," NBER Working Papers 5268, National Bureau of Economic Research, Inc.
  7. Sapienza, Paola & Toldra Simats, Anna & Zingales, Luigi, 2007. "Understanding Trust," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6462, C.E.P.R. Discussion Papers.
  8. Timothy N. Cason & Lata Gangadharan, 2006. "An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 44(2), pages 352-366, April.
  9. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, 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. 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, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 34(4), pages 712-745.
  12. Christine Jolls, 2007. "Behavioral Law and Economics," NBER Working Papers 12879, National Bureau of Economic Research, Inc.
  13. Eckel, Catherine C. & Grossman, Philip J., 2008. "Men, Women and Risk Aversion: Experimental Evidence," Handbook of Experimental Economics Results, Elsevier, Elsevier.
  14. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, American Economic Association, vol. 92(5), pages 1644-1655, December.
  15. Spagnolo, Giancarlo & Blonski, Matthias, 2001. "Prisoners' Other Dilemma," Working Paper Series in Economics and Finance, Stockholm School of Economics 437, Stockholm School of Economics, revised 20 Feb 2001.
  16. Spagnolo, Giancarlo, 2004. "Divide et Impera: Optimal Leniency Programmes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4840, C.E.P.R. Discussion Papers.
  17. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
  18. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 38(1), pages 45-76, March.
  19. Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, Elsevier, vol. 37(1), pages 29-53, October.
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Citations

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Cited by:
  1. Bigoni, Maria & Fridolfsson, Sven-Olof & Le Coq, Chloé & Spagnolo, Giancarlo, 2009. "Fines, Leniency and Rewards in Antitrust: an Experiment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7417, C.E.P.R. Discussion Papers.
  2. 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, European Association of Environmental and Resource Economists, vol. 56(3), pages 379-397, November.
  3. repec:dgr:uvatin:2008059 is not listed on IDEAS
  4. Søreide, Tina, 2009. "Too risk averse to stay honest?: Business corruption, uncertainty and attitudes toward risk," International Review of Law and Economics, Elsevier, Elsevier, vol. 29(4), pages 388-395, December.
  5. Jeroen Hinloopen & Adriaan Soetevent, 2008. "From Overt to Tacit Collusion," Tinbergen Institute Discussion Papers, Tinbergen Institute 08-059/1, Tinbergen Institute.

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