Criminal Networks, Market Externalities and Optimal Leniency

We analyze the relationship between competition and self-reporting incentives within a criminal network formed by a supplier of an illegal good and two dealers distributing the good to final consumers. The Legislator designs a leniency program to deter crime. We show that the comparison between the optimal amnesty with competition and monopoly in the dealership market depends on the strength of the externalities between dealers at the reporting stage. While in monopoly a leniency program is al- ways feasible, the opposite may happen with competition. This impossibility result is more relevant when the demand for the illegal product is large, when the market is neither too competitive nor too concentrated and when dealers know too much about each other. Moreover, in contrast to monopoly, the policy does not necessarily increase welfare in a competitive environment.