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

Author

Listed:
  • 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.

Suggested Citation

  • Bigoni, Maria & Le Coq, Chloé & Fridolfsson, Sven-Olof & Spagnolo, Giancarlo, 2008. "Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence From an Antitrust Experiment," SSE/EFI Working Paper Series in Economics and Finance 696, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0696
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    References listed on IDEAS

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    Cited by:

    1. Jeroen Hinloopen & Adriaan Soetevent, 2008. "From Overt to Tacit Collusion," Tinbergen Institute Discussion Papers 08-059/1, Tinbergen Institute.
    2. Dietrich Earnhart & Lana Friesen, 2013. "Can Punishment Generate Specific Deterrence Without Updating? Analysis of a Stated Choice Scenario," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 56(3), pages 379-397, November.
    3. 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.
    4. 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.

    More about this item

    Keywords

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

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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