Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence From an Antitrust Experiment
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 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.
|Date of creation:||22 Feb 2008|
|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
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.:
- 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.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-291, March.
- Spagnolo, Giancarlo & Blonski, Matthias, 2001.
"Prisoners' Other Dilemma,"
SSE/EFI Working Paper Series in Economics and Finance
437, Stockholm School of Economics, revised 20 Feb 2001.
- 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 411-429, February.
- Pedro Dal Bo & Guillaume R. Frechette, "undated". "The Evolution of Cooperation in Infinitely Repeated Games: Experimental Evidence," Working Papers 2007-7, Brown University, Department of Economics.
- Paola Sapienza & Anna Toldra & Luigi Zingales, 2007.
NBER Working Papers
13387, National Bureau of Economic Research, Inc.
- Jacquemet, Nicolas & Rullière, Jean-Louis & Vialle, Isabelle, 2008.
"Monitoring optimistic agents,"
Journal of Economic Psychology,
Elsevier, vol. 29(5), pages 698-714, November.
- Nicolas Jacquemet & Jean-Louis Rullière & Isabelle Vialle, 2008. "Monitoring optimistic agents," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00272928, HAL.
- A. Mitchell Polinsky & Steven Shavell, 1999.
"The Economic Theory of Public Enforcement of Law,"
NBER Working Papers
6993, National Bureau of Economic Research, Inc.
- Eckel, Catherine C. & Grossman, Philip J., 2008.
"Men, Women and Risk Aversion: Experimental Evidence,"
Handbook of Experimental Economics Results,
- Motta, Massimo & Polo, Michele, 2000.
"Leniency Programs and Cartel Prosecution,"
CEPR Discussion Papers
2349, C.E.P.R. Discussion Papers.
- Motta, M. & Polo, M., 1999. "Leniency Programs and Cartel Prosecution," Economics Working Papers eco99/23, European University Institute.
- Massimo Motta & Michele Polo, "undated". "Leniency Programs and Cartel Prosecution," Working Papers 150, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- 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.
- Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
- 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.
- Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October.
- Spagnolo, Giancarlo, 2004. "Divide et Impera: Optimal Leniency Programmes," CEPR Discussion Papers 4840, 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.
- 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.
- Christine Jolls, 2007. "Behavioral Law and Economics," NBER Working Papers 12879, National Bureau of Economic Research, Inc.
- Levitt, Steven D, 1998.
"Why Do Increased Arrest Rates Appear to Reduce Crime: Deterrence, Incapacitation, or Measurement Error?,"
Western Economic Association International, vol. 36(3), pages 353-372, July.
- 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.
- Folkes, Valerie S, 1988. " The Availability Heuristic and Perceived Risk," Journal of Consumer Research, Oxford University Press, vol. 15(1), pages 13-23, June.
When requesting a correction, please mention this item's handle: RePEc:hhs:hastef:0696. See general information about how to correct material in RePEc.
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.