SSE/EFI Working Paper Series in Economics and Finance
Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence From an Antitrust Experiment
(), Chloť Le Coq
(), Sven-Olof Fridolfsson
() and Giancarlo Spagnolo
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¬í 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' ¬ípropensity 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, ¬Ėa cognitive bias, where
people¬ís 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.
Keywords: Collusion; Leniency; Experiments; Risk Aversion; Availability Heuristic; Strategic Risk; (follow links to similar papers)
JEL-Codes: C92; D43; D81; (follow links to similar papers)
22 pages, February 22, 2008
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