Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence From an Antitrust Experiment
AbstractIn 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 playersÂ’ 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' Â’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, Â–a cognitive bias, where peopleÂ’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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 696.
Length: 22 pages
Date of creation: 22 Feb 2008
Date of revision:
Contact details of provider:
Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
Web page: http://www.hhs.se/
More information through EDIRC
Collusion; Leniency; Experiments; Risk Aversion; Availability Heuristic; Strategic Risk;
Find related papers by JEL classification:
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Blonski, Matthias & Spagnolo, Giancarlo, 2003.
"Prisoners' Other Dilemma,"
CEPR Discussion Papers
3856, C.E.P.R. Discussion Papers.
- Timothy N. Cason & Lata Gangadharan, 2006.
"An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement,"
Western Economic Association International, vol. 44(2), pages 352-366, April.
- 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.
- 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.
- 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.
- Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October.
- Motta, M. & Polo, M., 1999.
"Leniency Programs and Cartel Prosecution,"
Economics Working Papers
eco99/23, European University Institute.
- Motta, Massimo & Polo, Michele, 2000. "Leniency Programs and Cartel Prosecution," CEPR Discussion Papers 2349, C.E.P.R. Discussion Papers.
- Massimo Motta & Michele Polo, . "Leniency Programs and Cartel Prosecution," Working Papers 150, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- 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.
- Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
- A. Mitchell Polinsky & Steven Shavell, 1999.
"The Economic Theory of Public Enforcement of Law,"
NBER Working Papers
6993, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Pedro Dal Bo & Guillaume R. Frechette, .
"The Evolution of Cooperation in Infinitely Repeated Games: Experimental Evidence,"
2007-7, Brown University, Department of Economics.
- Pedro Dal Bo & Guillaume R. Frochette, 2011. "The Evolution of Cooperation in Infinitely Repeated Games: Experimental Evidence," American Economic Review, American Economic Association, vol. 101(1), pages 411-29, February.
- Nicolas Jacquemet & Jean-Louis Rullière & Isabelle Vialle, 2008.
"Monitoring optimistic agents,"
UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers)
- Eckel, Catherine C. & Grossman, Philip J., 2008.
"Men, Women and Risk Aversion: Experimental Evidence,"
Handbook of Experimental Economics Results,
- Sapienza, Paola & Toldra Simats, Anna & Zingales, Luigi, 2007.
CEPR Discussion Papers
6462, C.E.P.R. Discussion Papers.
- 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.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Gary S. Becker, 1974.
"Crime and Punishment: An Economic Approach,"
in: Essays in the Economics of Crime and Punishment, pages 1-54
National Bureau of Economic Research, Inc.
- Christine Jolls, 2007. "Behavioral Law and Economics," NBER Working Papers 12879, National Bureau of Economic Research, Inc.
- 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.
- Jeroen Hinloopen & Adriaan Soetevent, 2008. "From Overt to Tacit Collusion," Tinbergen Institute Discussion Papers 08-059/1, Tinbergen Institute.
- Bigoni, Maria & Fridolfsson, Sven-Olof & Le Coq, Chloé & Spagnolo, Giancarlo, 2008.
"Fines, Leniency and Rewards in Antitrust: An Experiment,"
Working Paper Series
738, Research Institute of Industrial Economics, revised 06 Aug 2009.
- 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.
- repec:dgr:uvatin:2008059 is not listed on IDEAS
- 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.
- Lana Friesen & Dietrich Earnhart, 2012. "Can Punishment Generate Specific Deterrence without Updating? Analysis of a Stated Choice Scenario," Discussion Papers Series 468, School of Economics, University of Queensland, Australia.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helena Lundin).
If references are entirely missing, you can add them using this form.