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Abstract:
We model the impact of bank mergers on loan competition, banks' reserve holdings and aggregate liquidity. Banks compete in a differentiated loan market, hold reserves against liquidity shocks, and refinance in the inter-bank market. A merger creates an internal money market that induces financial cost advantages and may increase reserve holdings. We assess changes in liquidity risk and expected liquidity needs for each bank and for the banking system. Large mergers tend to increase expected aggregate liquidity needs, and thus the liquidity provision by the central bank. Comparative statistics suggest that a more competitive environment moderates this effect.

Credit market competition, bank reserves, internal money market, banking system liquidity

Abstract:
We model the impact of bank mergers on loan competition, banks' reserve holdings and aggregate liquidity. Banks compete in a differentiated loan market, hold reserves against liquidity shocks, and refinance in the interbank market. A merger creates an internal money market that induces financial cost advantages and may increase reserve holdings. We assess changes in liquidity risk and expected liquidity needs for each bank and for the banking system. Large mergers tend to increase expected aggregate liquidity needs, and thus the liquidity provision by the central bank. Comparative statics suggest that a more competitive environment moderates this effect.

Credit market competition, bank reserves, internal money market, banking system liquidity

Abstract:
Leniency programs reduce sanctions for law violators that self-report. I focus on their ability to deter price-fixing cartels - and organized crime in general - by increasing incentives to "cheat" on partners. Moderate leniency programs that reduce/cancel sanctions for a spontaneously reporting party - as those normally implemented in reality - cannot affect cartels and other organized crime. Courageous leniency programs that reward spontaneously self-reporting parties may instead completely and costlessly deter them. When fines/rewards are pure transfers, optimal leniency programs maximize rewards for self-reporting. When financing rewards is costly, optimal leniency programs are restricted to the first reporting party and make this residual claimant for the fines paid by the others.

Antitrust law and policy; Self-reporting; Cartels; Collusion; Crime deterrence; Organized crime; Law enforcement

Abstract:
The paper addresses the effects of social relations on cooperation (or collusion) in organizations and communities. Social and production relations are modeled as separate repeated strategic interactions. "Linking" them--by employing members of the same community or by encouraging social interaction between employees--is shown to facilitate cooperation in production: (a) because of available "Social Capital," the slack of net expected gains from cooperation in the social relations which can be credibly transferred to discipline behavior in the workplace; (b) because payoffs from the social and production relations tend to be substitutes, in which case the linkage of more relations endogenously generates Social Capital (a sort of "increasing returns in cooperation"); (c) because the linkage generates transfers of "trust," reputation spillovers from a cooperative social background to newly started production relations; and (d) because agents who share social relations have access to additional information about each other's situations.

The model provides a microfoundation for Putnam's concept of "Social Capital" and for Granovetter's idea of "embeddedness" for the employment relation. It shows that Kandel and Lazear's peer pressures are a credible effort-enforcing mechanism even when teams' members are fully self-interested, and that the threat of social sanctions can credibly enforce social norms independent of agents' moral constraints (that is, no "second-order free rider problem" exists). It provides an explanation for Japanese firms' investments in employees' free-time activities, for the Grameen Bank's requirement that group members belong to the same village and participate in social activities, for the ambiguous empirical results on the effectiveness of group-incentives, for markets' tendency to crowd out cooperative institutions, and for the sudden breakdown in trust and cooperation observed in communities after a war ends and peace is established.

Abstract:
The paper characterizes the effects of social relations on agents' ability to sustain cooperation (or collusion) within organizations' teams or communities. We model social and production relations as separate repeated strategic interactions. "Linking" them, for example by employing members of the same community, or by encouraging social interaction between employees, turns out to facilitate cooperation in the workplace for the following reasons: (i) there may be available "Social Capital," a slack of net expected gains from cooperation in the social relations that can be used to discipline cooperation in production; (ii) payoffs from the social and production relations are typically substitutes, so that the linkage endogenously generates new Social Capital (a sort of "economies of scope in cooperation"); (iii) the linkage allows for transfers of "trust" between the relations, that is reputation spillovers from a cooperative social background to production relations; and (iv) agents who share their social background have access to relevant information about each other's situations. The model provides a microfoundation for Putnam's concept of "Social Capital" and for Granovetter's idea of "embeddedness" for the employment relation. It shows that Kandel and Lazear's peer pressures are a credible effort-enforcing mechanism even when teams' members are fully self-interested, and that the threat of social sanctions can credibly enforce social norms independent of agents' moral constraints (that is, no "second-order free rider problem" exists). It provides an explanation for Japanese firms' investments in employees' free-time activities, for the Grameen Bank's requirement that group members belong to the same village and participate in social activities, for the ambiguous empirical results on the effectiveness of group-incentives, for markets' tendency to crowd out cooperative institutions, and for the sudden breakdown in trust and cooperation observed in communities after a war ends and peace is established.

Abstract:
I find that current US's and EU's Antitrust laws -- in particular their "moderate" leniency programmes that only reduce or at best cancel sanctions for price-fixing firms that self-report -- may make collusion enforceable even in one-shot competitive interactions, like Bertrand oligopolies and first-price auctions, where no collusion would be supportable otherwise. The reduced sanctions for firms that self-report provide the otherwise missing credible threat necessary to discipline collusive agreements: they ensure that if a firm unilaterally deviates from collusive strategies, other firms find it convenient to punish it by reporting information to the Antitrust Authority.

Antitrust law, leniency, self-reporting, cartels, collusion, bid-rigging, oligopoly, auctions

Abstract:
The paper considers how the separation between ownership and control affects product-market competition in mature (repeated) oligopolies. It finds that as long as managers have a preference for smooth profits, as revealed by the empirical evidence on "income smoothing," by delegating control owners can sustain any tacit collusive agreement at lower discount factors. Common "low-powered" managerial incentives with monetary bonuses or incumbency rents make the joint monopoly collusive agreement supportable at any discount factor. The low pay-performance sensitivity for CEOs found by Jensen and Murphy (1990) and Kaplan (1994) is then "optimal," it maximizes firms' (collusive) profits. It is also shown that when managers are in control price wars during booms need not occur; the most collusive price may instead be pro-cyclical.

Abstract:
We model networks of relational (or implicit) contracts, exploring how sanctioning power and equilibrium conditions change under different network configurations and information transmission technologies. In our model relations are the links, and the value of the network lies in its ability to enforce cooperative agreements that could not be sustained if agents had no access to other network members' sanctioning power and information. We identify conditions for network stability and in-network information transmission as well as conditions under which stable sub-networks inhibit more valuable larger networks. The model provides formal definitions for individual and communities' 'social capital' in the spirit of Coleman and Putnam.

Networks, relational contracts, implicit contracts, industrial districts, indirect multimarket contact, cooperation, collusion, social capital, social relations, embeddedness, end-network effect, peering agreements

Abstract:
We model networks of relational (or implicit) contracts, exploring how sanctioning power and equilibrium conditions change under different network configurations and information transmission technologies. In our model relations are the links, and the value of the network lies in its ability to enforce cooperative agreements that could not be sustained if agents had no access to other network members' sanctioning power and information. We identify conditions for network stability and in-network information transmission as well as conditions under which stable subnetworks inhibit more valuable larger networks. The model provides formal definitions for individual and communities' "social capital" in the spirit of Coleman and Putnam.

Networks, Relational Contracts, Implicit Contracts, Industrial Districts, Indirect Multimarket Contact, Cooperation, Collusion, Social Capital, Social Relations, Embeddedness, End-Network Effect, Peering Agreements

Abstract:
We propose a general framework for analyzing and comparing ownership structures with respect to creating incentives for co-operative behavior (e.g. efficient investment) in long-run relationships. We generalize models by Garvey (1995), Halonen (2002), and Baker, Gibbons and Murphy (2002) and compare their results in the light of our theory, going in depth into the issue of renegotiation of ownership and strategies. We show that when agents are not restricted in their strategy choice to grim trigger strategies, the short term efficient ownership structure identified by Hart and Moore (1990) is not relational efficient - i.e. does not maximize the set of discount factors under which efficient investment can be supported in equilibrium of the repeated game. Moreover, the reletional efficient ownership structure is independent of what can be renegotiated, ownership, strategies, both or none.

Abstract:
We propose a general framework for analyzing and comparing ownership structures with respect to creating incentives for co-operative behavior (e.g. efficient investment) in long-run relationships. We generalize models by Garvey (1995), Halonen (2002), and Baker, Gibbons and Murphy (2002) and compare their results in the light of our theory, going in depth into the issue of renegotiation of ownership and strategies. We show that when agents are not restricted in their strategy choice, the short-term efficient ownership structure identified by Hart and Moore (1990) is not relational efficient - i.e. does not maximize the set of discount factors under which efficient investment can be supported in equilibrium of the repeated game. Moreover, the relational efficient ownership structure is independent of what can be renegotiated: ownership, strategies, both or none.

Theory of the firm, implicit contracts, incomplete contracts, vertical integration, non-contractual relations, ownership structures, supply relations

Abstract:
The paper presents a theory of the anti-competitive effects of debt finance based on the interaction between capital structure, managerial incentives, and firms' ability to sustain collusive agreements. It shows that shareholders' commitments that reduce conflicts with debtholders - such as hiring managers with valuable reputations or "conservative" incentives - besides reducing the agency costs of debt finance also greatly facilitate tacit collusion in product markets. Concentrated or collusive credit markets, interlinked banking groups, or simply large banks can ensure the credibility of such commitments (renegotiation-proofness), thereby "exporting" collusion through leverage in otherwise competitive downstream product markets. The results appear relevant to the debate on the relative efficiency of "Anglo-Saxon" vs. "Continental-Japanese" financial practices. Implications for competition policy in the credit market and the regulation of the banking industry are discussed.

Abstract:
We review current methods for calculating fines against cartels in the US and EU, and simulate their deterrence effects under different assumptions on the legal and economic environment. It is likely that European fines have not had significant deterrence effects before leniency programs were introduced. Previous simulations of the effects of fines ignore the different type of deterrence that leniency programs bring about, and, therefore, grossly overstate the minimum fine likely to have deterrence effects. With schemes that reward whistleblowers, the minimum fine with deterrence effects falls to extremely low levels (below 10% of the optimal Beckerian fine). Strategic judgement-proofness can and should be prevented by suitable regulation or extended liability. Criminal sanctions, in the form of imprisonment, certainly bring benefits (and costs) in terms of cartel deterrence, but the firms' limited ability to pay does not appear any longer such a strong argument for their introduction.

Antitrust Amnesty, Cartels, Collusion, Corporate crime, Debt, Deterrence, Extended liability, Fines, Law enforcement, Leniency, Immunity, Imprisonment, Judgment proofness, Optimal fines, Optimal sanctions, Optimal liability, Organized crime, Political economy, Rewards, Sunk cost bias, Whistleblowers

Abstract:
In softening price competition at the tendering stage, a bidding ring may jeopardize the buyer's effort to award a procurement contract at her most advantageous economic conditions. By exploiting the similarities between oligopolistic and procurement markets, we discuss how structural conditions of the procurement market such as the presence of barriers to entry, demand fluctuations, frequency of interactions among suppliers and market transparency affect the sustainability of collusive agreements among participants in a tendering process. We then evaluate the extent to which some aspects of the tendering design such as the choice of tendering format, and in particular of the scoring rule, the constraints on bidding consortia and subcontracting may enhance price competition and limit the risk of successful bid-rigging.

We also review one case of "suspected" coordinated bidding in the procurement market for a pharmaceutical product in Italy, and provide a detailed account of the collusive agreement put in place by a cartel in the "Lunch Coupon" market, also in Italy, that was uncovered and convicted by the Italian Antitrust Authority.

procurement, oligopoly, collusion

Abstract:
Online "feedback mechanisms" - also known as "reputation systems" - have been implemented in the most important private e-markets, such as eBay, Yahoo!, Amazon to foster trust and cooperation among trading partners. In this paper we discuss the main issues relevant for the optimal design of such mechanisms, providing practical indications for public and private e-platforms.

Procurement, reputation, feedback mechanisms

Abstract:
When isolated communities get in contact with more developed economic institutions an internal breakdown of cooperation typically occurs. Why do money and markets crowd out cooperative relations? I propose a new theoretical explanation of this phenomenon based on the interaction between players' aversion to intertemporal substitution, their ability to access goods and financial markets, and their ability to sustain cooperation. Real world agents are strongly averse to intertemporal substitution. This turns out to facilitate cooperation, since it reduces agents' evaluation of short-run gains from unilateral deviations relative to losses from punishments. The access to money and markets, therefore, makes cooperation harder to sustain by allowing agents to improve the intertemporal allocation of short-run gains from unilateral deviations; that is, by increasing agents' evaluation of direct gains from "cheating." By allowing for free intertemporal reallocation of payoffs, perfect financial markets always make cooperation harder. Financial markets' imperfections facilitate cooperation (and collusion) by opposing this effect.

Abstract:
This paper shows that as long as agents in financial markets have rational expectations and firms pay out dividends, most common stock-based managerial compensation plans greatly facilitate tacit collusion in long-run (repeated) oligopolies. They may make the joint monopoly agreement supportable at any level of the discount factor. Stock-based incentives link managers' present compensation to the stock market's expectations about firms' future profitability. When a breach of a tacit collusive agreement occurs, a stock market with rational expectations anticipates the negative effect of the breach on firms' future profitability due to the forthcoming market war, and immediately discounts it on the stock price. Because this effect occurs in the same period in which a manager deviates, incentives linked to stock price directly reduce managers' gains from breaking any collusive agreement. When stock-based incentives are deferred, the pro-collusive effect is reinforced since the already limited beneficial effect on the stock price of short-run profits from a unilateral breach of a collusive agreement may be completely gone at the time when the manager receives the bonus.

Abstract:
This paper shows that as long as agents in financial markets have rational expectations and firms pay out dividends, most common stock-based managerial compensation plans greatly facilitate tacit collusion in long-run (repeated) oligopolies. They may make the joint monopoly agreement supportable at any level of the discount factor. Stock-based incentives link managers' present compensation to the stock market's expectations about firms' future profitability. When a breach of a tacit collusive agreement occurs, a stock market with rational expectations anticipates the negative effect of the breach on firms' future profitability due to the forthcoming market war, and immediately discounts it on the stock price. Because this effect occurs in the same period in which a manager deviates, incentives linked to stock price directly reduce managers' gains from breaking any collusive agreement. When stock-based incentives are deferred, the pro-collusive effect is reinforced since the already limited beneficial effect on the stock price of short-run profits from a unilateral breach of a collusive agreement may be completely gone at the time when the manager receives the bonus.

Abstract:
Most of the literature on monetary policy delegation assumes that the government can credibly commit to the delegation contract, an assumption criticized by McCallum. This paper provides some foundations for the assumption that renegotiating a delegation contract can be costly by illustrating how political institutions can generate inertia in recontracting, reduce the gains from it or prevent it altogether. Once the nature of renegotiation costs has been clarified, it is easier to see why certain institutions can mitigate or solve dynamic inconsistencies better than others. The paper points to institutions which give Western democracies the technology to make credible delegation commitments, and argues that the ECB is an example of credible delegation.

constitution, delegation, inertia, renegotiation costs, separation of powers

Abstract:
How many international agreements should there be, and who should sign them? When policy issues are separable, linking them in a "grand international agreement" facilitates policy cooperation by reallocating slack enforcement power. When policy issues are substitutes, issue linkage facilitates policy cooperation also by increasing the amount of available enforcement power. The contrary happens when issues are complements. Then a better strategy can be to delegate policy issues to different, independent national agencies with the same objectives than governments. Constitutional rules that permit credible delegation to agencies with different objectives than governments further facilitate international cooperation by generating stronger credible threats. Implications for multilateral agreements are discussed.

Abstract:
We study the specific corporate governance problems of central banks in their complex role of inflation guardians, bankers' banks, financial industry regulators/supervisors and, in some cases, competition authorities and deposit insurance agencies. We review the current institutional arrangements of a number of central banks, e.g. formal objectives, ownership, board and governor appointment rules, term limits and compensation, using both existing surveys and newly collected information. Research on central bank governance appears to have focused almost only on their monetary policy task. As shown by the sub-prime loan market turmoil, central banks play a crucial role in financial markets not only in setting monetary policy, but also in ensuring their stability. In this paper, we contrast the current governance practices at central banks with the structures suggested in the corporate governance literature. Our analysis highlights a number of specific issues that appear to have been unsatisfactorily addressed by existing research, such as the incentive structure for governors and board members, the balance between central banks' multiple objectives and the need for term limits.

accountability, bank regulation, board structure, central banks, corporate governance, central bank independence, governor remuneration, term limits

Abstract:
Following Bernheim and Whinston (1990), this paper addresses the effects of multimarket contact on firms' ability to collude. Real world imperfections tend to make firms' objective function strictly concave and market supergames "interdependent": firms' payoffs in each market depend on how they are doing in others. Then, multimarket contact always facilitates collusion. It may even make it sustainable in all markets when otherwise it would not be sustainable in any. The effects of conglomeration are discussed. "Multi-game contact" is shown to facilitate cooperation in supergames other than oligopolies as long as agents' objective function is submodular in material payoffs.

Abstract:
Following Bernheim and Whinston (1990), this paper addresses the effects of multimarket contact on firms' ability to collude. Real world imperfections tend to make firms' objective function strictly concave and market supergames "interdependent": firms' payoffs in each market depend on how they are doing in others. Then, multimarket contact always facilitates collusion. It may even make it sustainable in all markets when otherwise it would not be sustainable in any. The effects of conglomeration are discussed. "Multi-game contact" is shown to facilitate cooperation in supergames other than oligopolies as long as agents' objective function is submodular in material payoffs.

Abstract:
Division in lots is one of the procurer's most crucial decisions. The number and the size of lots directly influences competition in the tendering process and thereby the procurer's budget and the quality of supply. This paper focuses on the effects the division of procurements into multiple lots has on competition in the short and in the long run. Short-run competition is affected mainly through two channels: the number of participants and the participants' behaviour. Both depend on market structure and procurement design. We discuss the relationship between the number of lots, participation, competition, and potential collusion in competitive procurement, and propose two simple indices that allow to evaluate how competition responds to an increase of the number of lots. Competition in a single competitive tendering process (static competition) determines the outcome in terms of price and quality today. The level of market competition in the long run, however, is not so obviously related to the static one. In certain sectors, maximizing competition in the short-run might have negative effects on the level of competition in the long run. We discuss how current procurement design may affect entry and exit of firms over time, and thereby the number of participants to future procurements. We show that sometimes strong competition today may imply weak competition tomorrow.

Procurement, lots, competition indeces

Abstract:
In practical activity, the procurer can often decide to split the supply of a product in multiple contracts, or lots. This paper surveys some competitive tendering procedures for multiple contracts and discusses how the choice of the most appropriate format of competitive tendering for the procurer should depend upon the costs that suppliers face in serving the contracts. In particular, a group of contracts is characterized by strong positive (negative) complementarities when the cost of serving them as a group is considerably lower (higher) than the sum of the costs of serving each of them alone. With both positive and negative complementarities in order to maximize savings, and obtain high quality standards for the procured goods and services, the buyer should introduce package bidding allowing suppliers to bid for sets of contracts as well as for single ones. Besides reducing suppliers' exposure to the risk of being awarded the "wrong" combination of contracts, package bidding allows to divide the supply in smaller lots without preventing large producers from exploiting economies of scale, thereby favoring smaller suppliers' participation and a more efficient allocation of the contracts.

Procurement, complementarities, package bidding

Abstract:
Collusive agreements and relational contracts are commonly modeled as equilibria of dynamic games with the strategic features of the repeated Prisoner's Dilemma. The pay-offs agents obtain when being 'cheated upon' by other agents play no role in these models. We propose a way to take these pay-offs into account, and find that cooperation as equilibrium of the infinitely repeated discounted Prisoner's Dilemma is often implausible: For a significant subset of the pay-off discount factor parameter space, all cooperation equilibria are strictly risk dominated in the sense of Harsanyi and Selten (1988). We derive an easy-to-calculate critical level for the discount factor below which this happens, also function of pay-offs obtained when others defect, and argue it is a better measure for the 'likelihood' of cooperation than the critical level at which cooperation is supportable in equilibrium. Our results apply to other games sharing the strategic structure of the Prisoner's Dilemma (repeated oligopolies, relational-contracting models, etc.). We illustrate our main result for collusion equilibria in the repeated Cournot duopoly.

Cooperation, collusion, repeated games, relational contracts, risk dominance, cartel stability, strategic risk

Abstract:
We find that - contrary to common perception - co-operation as equilibrium of the infinitely repeated discounted Prisoner's Dilemma is in many relevant cases not very plausible: For a significant subset of the payoff-discount factor parameter space, all co-operation equilibria are strictly risk dominated (in the sense of Harsanyi and Selten, 1988) by defection. We derive an easy-to-calculate critical level for the discount factor below which this happens, and argue it is a better measure for the "likelihood" of co-operation than the critical level at which co-operation is supportable in equilibrium. The results apply to other games sharing the strategic features of the repeated Prisoner's Dilemma, such as models of implicit/relational contracts, common pools and public good provision. We illustrate our main result for collusion equilibria in the repeated Cournot duopoly.

Risk Dominance, repeated games, Prisoner's Dilemma, relational contracts

Abstract:
Leniency policies and rewards for whistleblowers are being introduced in ever more fields of law enforcement, though their deterrence effects are often hard to observe, and the likely effect of changes in the specific features of these schemes can only be observed experimentally. This paper reports results from an experiment designed to examine the effects of fines, leniency programs, and reward schemes for whistleblowers on firms' decision to form cartels (cartel deterrence) and on their price choices. Our subjects play a repeated Bertrand price game with differentiated goods and uncertain duration, and we run several treatments differing in the probability of cartels being caught, the level of fine, the possibility of self-reporting (and not paying a fine), the existence of a reward for reporting. We find that fines following successful investigations but without leniency have a deterrence effect (reduce the number of cartels formed) but also a pro-collusive effect (increase collusive prices in surviving cartels). Leniency programs might not be more efficient than standard antitrust enforcement, since in our experiment they do deter a significantly higher fraction of cartels from forming, but they also induce even higher prices in those cartels that are not reported, pushing average market price significantly up relative to treatments without antitrust enforcement. With rewards for whistle blowing, instead, cartels are systematically reported, which completely disrupts subjects' ability to form cartels and sustain high prices, and almost complete deterrence is achieved. If the ringleader is excluded from the leniency program the deterrence effect of leniency falls and prices are higher than otherwise. As for tacit collusion, under standard antitrust enforcement or leniency programs subjects who do not communicate (do not go for explicit cartels) tend to choose weakly higher prices than where there is no anti-trust enforcement. We also analyze post-conviction behavior, finding that there is a strong ex-post deterrence (desistance) effect. Moreover post-conviction prices are on average lower than before even though the average prices within cartels are the same. Finally, we find a strong cultural effect comparing treatments in Stockholm with those in Rome, suggesting that optimal law enforcement institutions differ with culture.

Antitrust, Collusion, Experiment, Leniency

Abstract:
Quality and suppliers performance are essential for procurement. This Paper analyses these important issues from two perspectives. The first part deals with the topic of contracting. It describes the features of some common types of contracts that the buyer may choose according to the circumstances of the procurement. The central issue is how the procurer should choose and then design the contract to optimally balance the trade-off between incentives to limit the contractor's supply cost and the flexibility to ex-post adaptation to potential unforeseen events.

When important characteristics of the supply cannot be easily described in - and enforced within - the contract, the procurer must use other tools to ensure successful procurement. The second part of the Paper deals with this important problem, also known as non-contractible quality.

The part provides indications about the methods the procurer may use to obtain adequate quality and customer satisfaction and illustrates which method seems to fit better in the specific procurement context.

procurement, contracts, contractible and non-contractible quality

Abstract:
Leniency programs (or policies) reduce sanctions against cartel members that self-report to the Antitrust Authority. We focus on their ability to directly deter cartels and analogous criminal organizations by undermining internal trust, increasing individual incentives to 'cheat' on partners. Optimally designed 'courageous' leniency programs reward the first party that reports sufficient information with the fines paid by all other parties, and with finitely high fines achieve the first best. 'Moderate' leniency programs that only reduce or cancel sanctions, as implemented in reality, may also destabilize and deter cartels by (a) protecting agents that defect (and report) from fines; (b) protecting them from other agents' punishment; and (c) increasing the riskiness of taking part to a cartel.

Amnesty, antitrust, cartels, collusion, corruption, competition policy, immunity, law enforcement, leniency, oligopoly, organized crime, repeated games, risky cooperation, whistleblowers

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, Â-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.

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

Abstract:
The paper reviews the recent evolution of leniency programs for cartels in the US and EU, surveys their theoretical economic analyses, and discusses the empirical and experimental evidence available, also looking briefly at related experiences of rewarding whistleblowers in other fields of law enforcement. It concludes with a list of desiderata for leniency and whistleblower reward programs, simple suggestions how to improve current ones, and an agenda for future research. The issues discussed appear relevant to the fight of other forms of multiagent organized crime - like auditor-manager collusion, financial fraud, or corruption - that share with cartels the crucial features that well designed leniency and whistleblower programs exploit.

Amnesty, antitrust, cartels, collusion, corruption, competition policy, corporate crime, deterrence, immunity, leniency, organized crime, snitches, self-reporting, whistleblowers

Abstract:
To stay on top of global competition, firms and governments often need to acquire innovative goods and services, including ideas and research, from their strategic suppliers. A careful design of procurement policy is crucial to make potential suppliers generate and sell the most suitable innovation. Moreover, procurement by public agencies and large firms often set the incentives for the development of innovations economy-wide. In this paper, guided by recent micro- and macro-economic research, we discuss vices and virtues of the many ways to induce potential suppliers to create and sell innovations. We consider a menu of procurement methods and policies for best procuring new knowledge and innovative products, discussing their costs and benefits in different possible scenarios and suggesting criteria to choose among them. We explain how to optimize the degree of competition between suppliers, as well as other more practical indirect ways to stimulate innovation. We discuss the effects of standard setting activities by large, often public, procurers on innovation races. We evaluate how public and large private firm's procurement may induce innovation and growth at the national, industry or supply network level by affecting input market prices and the returns to human capital formation. Finally, we point out how risk management methods used in procurement should be modified when innovation is a central concern for a buyer.

Auctions, contests, knowledge, innovation, procurement, sourcing, R&D, standards, technology, supplier investment, ideas, innovative supply, competitiveness, prizes, (procurement) risk management, innovation policy

Abstract:
This paper applies results from recent theoretical work on networks of relations to analyze optimal peering strategies for asymmetric ISPs. From a network of relations perspective, ISPs' asymmetry in bilateral peering agreements need not be a problem, since when these form a closed network, asymmetries are pooled and information transmission is faster. Both these effects reduce the incentives for opportunism in general, and interconnection quality degradation in particular. The paper also explains why bilateral monetary transfers between asymmetric ISPs (Bilateral Paid Peering), though potentially good for bilateral peering, may have negative effects on the sustainability of the overall peering network.

Internet Service Provider, Internet Peering Agreements, Transit, Networks of Relations, Quality Degradation, Implicit Contracts

Abstract:
We test infinitely repeated prisoner's dilemma games with random continuation in the laboratory to capture the effect of strategic risk on co-operation. We propose a criterion building on Harsanyi and Selten's (1988) risk dominance concept and motivate it by three heuristic principles. Our criterion depends on the often disregarded "sucker's payoff" - the payoff of a co-operating player meeting a defector - and results in a critical discount factor delta* strictly larger than delta, the traditional criterion, above which co-operation is supported by Pareto-undominated equilibrium strategies and which has often been used in applications.

We find that changes in the frequency of subjects' co-operation in the lab are predicted far better by delta* than by the Pareto-dominance criterion reflected in delta. Our experiments, in particular, show that for parameter changes where the two criteria predict co-operation frequency changes in opposite directions, our alternative criterion delta* is the one that predicts correctly.

co-operation, repeated Prisoner's Dilemma, experiments, strategic risk, risk dominance, sucker's payoff, collusion, corruption

Abstract:
In this paper we explore theoretically the relationship between explicit and implicit/relational contracting distinguishing between the ex-ante decision to sign an explicit contract and the ex-post decision wheter to actually apply it. We show, among other things, that the relational efficient explicit contract tends to display overcontracting on tasks or qualitative requirements (A) that are verifiable but apparently of little use for the principal. The ex-post (non)implementation of such explicit contract can then be discretionally exchanged against the provision of non contractible tasks (B) that are highly valuable for the principal. An empirical implication of the result, consistent with casual observation in procurement, is that penalties for infringements established by explicit contracts are seldom exercised, even though violations take place and are easy to monitor and verify.

Implicit contracts, incomplete contracts, repeated games

Abstract:
Peering decisions between Internet Service Providers (ISPs) contain substantial non-measurable aspects requiring trust and informal cooperation among peering partners. We study whether virtual districts are observed between Internet peers. Our empirical analysis of the bilateral peering decisions at the Milan Internet Exchange confirms that these decisions are significantly influenced by: travel time either between ISPs' headquarters or towards the exchange - a proxy for distance, bandwidth - a proxy for size, and European connectivity. Proximity still plays a role in reducing the transaction costs of monitoring and punishing deviant behavior within an industry where trust is essential for Internet universal connectivity.

Abstract:
We study the consequences of leniency - reduced legal sanctions for wrongdoers who spontaneously self-report to law enforcers - on sequential, bilateral, illegal transactions such as corruption, manager-auditor collusion, or drug deals. It is known that leniency helps to deter illegal relationships sustained by repeated interaction. Here we find that - when not properly designed - leniency may simultaneously provide an effective governance mechanism for occasional sequential illegal transactions that would not be feasible in its absence.

Amnesty, corruption, collusion, financial fraud, governance, hold up, hostages, illegal trade, immunity, law enforcement, leniency, organized crime, self-reporting, whistleblowers

Abstract:
This Paper, a thorough revision of Spagnolo (1996), addresses the following questions: What is the optimal design for a set of self-enforcing international policy agreements? How many and which issues should each agreement regulate? Are GATT's constraints on issue linkage (cross-retaliation) welfare-enhancing? To facilitate international cooperation should governments keep policy issues under centralized control, or should they delegate them to independent agencies (e.g. central banks)? In the second case, which issues should be delegated? Finally, institutions allowing governments to credibly delegate policy choices (e.g. to 'conservative' central bankers) are good or bad for international policy cooperation?

Cooperation, cross-border spillovers, delegation, international agreements, international institutions, linkages, policy coordination

Abstract:
We review current methods for calculating fines against cartels in the US and EU, and simulate their deterrence effects under different assumptions on the legal and economic environment. It is likely that European fines have not had significant deterrence effects before leniency programs were introduced. Previous simulations of the effects of fines ignore the different type of deterrence that leniency programs bring about, and, therefore, grossly overstate the minimum fine likely to have deterrence effects. With schemes that reward whistleblowers, the minimum fine with deterrence effects falls to extremely low levels (below 10% of the optimal "Beckerian" fine). Strategic judgement-proofness can and should be prevented by suitable regulation or extended liability. Criminal sanctions, in the form of imprisonment, certainly bring benefits (and costs) in terms of cartel deterrence, but the firms' limited ability to pay does not appear any longer such a strong argument for their introduction.

Cartels, collusion, corporate crime, debt, deterrence, extended liability, fines, law enforcement, leniency, immunity, imprisonment, judgement proofness, optimal fines, optimal sanctions, optimal liability, organized crime, political economy, rewards, sunk cost bias, whistleblower

Abstract:
I characterize the effects of empirically observed managerial incentives on long-run oligopolistic competition. When managers have a preference for smooth time-paths of profits - as revealed by the empirical literature on 'income smoothing' - manager-led firms can sustain collusive agreements at lower discount factors. Capped bonus plans and incumbency rents with termination threats make collusion supportable at any discount factor, independent of contracts' duration. When managers have these preferences/incentives and demand fluctuates, 'price wars during booms' need not occur: the most collusive price may then be pro-cyclical. Corporate governance codes invoking transparency may reinforce these effects.

Corporate governance, delegation, earnings management, executive compensation, collusion, income smoothing, oligopoly, ownership and control

Abstract:
Globalization - improved access to integrated, anonymous markets - is claimed to crowd out cooperative relations: From reciprocal exchange to lifetime employment, from relational governance to corruption/collusion. We study how agents' intertemporal preferences and their access to markets interact and affect their ability to sustain generalized cooperative relations. The aversion to intertemporal substitution, a regular feature of real world agents, facilitates cooperation by decreasing the evaluation of short-run gains from unilateral defections and by increasing that of losses from punishment phases. Access to goods' markets and 'money' may then hinder cooperation by undoing these effects, allowing agents to save and reallocate short-run gains from defections in time at some cost. With their positive return on capital (savings), financial markets make cooperation even harder to sustain, unless the market interest rate is sufficiently below agents' discount rate or there are sufficiently strong income fluctuations. Then financial markets may in fact facilitate relations, by increasing cooperating agents' debt capacity and allowing them to smooth fluctuations along the cooperative equilibrium path.

Market access, cooperation, relational contracts, governance, commons, reciprocal exchange, lifetime employment, social capital, access to finance, globalization, financial development

Abstract:
We model a new effect of exclusivity on non-contractible investments in buyer/seller relationships. By restricting the buyer to purchase from only one seller, exclusivity increases the buyer's costs of haggling during renegotiation and, hence, the seller's relative bargaining power and bargaining share. This, in turn, fosters the seller's incentives to invest even for investments that are fully specific to the relationship ('internal investments'), in contrast to a recent finding by Segal and Whinston (2000b).

Bargaining, contracting, exclusive dealing, incomplete contracts, investment, foreclosure

Abstract:
In this paper we explore theoretically the relationship between explicit and implicit/relational contracting distinguishing between the ex-ante decision to sign an explicit contract and the ex-post decision whether to actually apply it. We show, among other things, that the relational efficient explicit contract tends to display overcontracting on tasks or qualitative requirements (A) that are verifiable but apparently of little use for the principal. The ex-post (non)implementation of such explicit contract can then be discretionally exchanged against the provision of non contractible tasks (B) that are highly valuable for the principal. An empirical implication of the result, consistent with casual observation in procurement, is that penalties for infringements established by explicit contracts are seldom exercised, even though violations take place and are easy to monitor and verify.

Relational Contracting, Overcontracting

Abstract:
Feedback mechanisms that allow partners to rate each other after a transaction are considered crucial for the success of anonymous internet trading platforms. We document an asymmetry in the feedback behaviour on eBay, propose an explanation based on the micro structure of the feedback mechanism and the time when feedbacks are given, and support this explanation by findings from a large data set. Our analysis implies that the informational content of feedback records is likely to below. The reason for this is that agents appear to leave feedbacks strategically. Negative feedbacks are given late, in the 'last minute', or not given at all, because of the fear of retaliative negative feedback. Conversely, positive feedbacks are given early in order to encourage reciprocation. Towards refining our insights into the observed pattern, we look separately at buyers and sellers, and relate the magnitude of the effects to the trading partners' experience.

eBay, reputation mechanism, strategic feedback behaviour, informational content, reciprocity, fear of retaliation

Abstract:
This chapter examines the relationship between corporate governance and competition, particularly with regard to cartel formation, and discusses how corporate governance and firm agency problems affect optimal law enforcement against cartels, both in terms of sanctions and leniency policies. Many of the conclusions appear applicable, with minor changes, to non-antitrust forms of collusion, such as collusion between auditors and management, and more generally to corporate and organized crime.

Amnesty, Antitrust, Cartels, CEO compensation, Collusion, Corporate crime, Corporate fraud, Corporate governance, Corporate liability, Corruption, Deterrence, Employee liability, Fines, Immunity, Imprisonment, Indemnification, Judgement proofness, Leniency, Managerial incentives, Optimal sanctions, Rewards, Whistleblowers

Abstract:
This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy as measured by newly created indexes. We provide several arguments and results based on instrumental variables estimators as well as non-linearities, to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional set up and antitrust activities (rather than merger control). The effect is strengthened by a good legal system, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.

Competition Policy, Productivity Growth, Institutions, Deterrence, OECD

Abstract:
This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy as measured by newly created indexes. We provide several arguments and results based on instrumental variables estimators as well as non-linearities to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional set up and antitrust activities (rather than merger control). The effect is strengthened by good legal systems, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.

Antitrust, Competition Policy, Deterrence, Institutions, Productivity Growth

Abstract:
We study the tension between competitive screening and contract enforcement where a principal trades repeatedly with one among several agents, moral hazard and adverse selection coexist, and non-contractible dimensions are governed by relational contracting. We simultaneously characterize optimal relational contracts and competitive screening policies which are interdependent. When non-contractible dimensions are important, the principal optimally restricts competitive screening to a subset of 'loyal' agents, giving up performance bonuses and, when such dimensions are crucial, negotiates an indefinitely renewable contract with one agent. To enhance enforcement, explicit contract duration is also reduced. However, these policies facilitate collusion among agents, which induces an additional trade-off between reputational forces and collusion. When non-contractible dimensions are very important this last trade-off may disappear, as collusion allows more efficient enforcement of better performance.

auctions, collusion, contract duration, efficiency wages, implicit and incomplete contracts, Limited enforcement, Loyalty, Multi-tasking, Negotiation, Non-contractible quality, Performance bonus, Procurement, Relational contracts, Reputation, Screening

Abstract:
This paper reports results from an experiment studying how fines, leniency programs and reward schemes for whistleblowers affect cartel formation and prices. Antitrust without leniency reduces cartel formation, but increases cartel prices: subjects use costly fines as (altruistic) punishments. Leniency further increases deterrence, but stabilizes surviving cartels: subjects appear to anticipate harsher times after defections as leniency reduces recidivism and lowers post-conviction prices. With rewards, cartels are reported systematically and prices finally fall. If a ringleader is excluded from leniency, deterrence is unaffected but prices grow. Differences between treatments in Stockholm and Rome suggest culture may affect optimal law enforcement.

Cartels, Collusion, Competition policy, Coordination, Corporate crime, Desistance, Deterrence, Law enforcement, Organized crime, Price-fixing, Punishment, Whistleblowers

Abstract:
Joint bidding is the practice of two or more independent suppliers submitting a single bid, a widespread practice in private and public procurement. This practice may generate efficiencies through synergies and information sharing, but may also be abused to reduce the number of competitors or-even worse-to facilitate or enforce collusion among them; therefore, it is often regulated. In this paper, we first present results from a survey on the regulation of joint bidding in European public procurement, documenting how the existence and the type of regulation differ across countries, and that-where present-regulation is often related to the ability of an individual firm to be admitted as a solo bidder. Borrowing from the theories of joint bidding in auctions and of horizontal mergers and joint ventures in oligopoly, we then review the basic economics of bidding consortia and the effects that these can have in terms of bidding competition, coordination among firms, risk management, exploitation of other synergies, and entry. Finally, we assess the relative degrees of restrictiveness of several practical criteria that could be used to create consistent regulatory requirements for bidding consortia in public procurement. The only strong conclusion that we can draw is that there is an urgent need for further theoretical and empirical or experimental research on this very important issue for public procurement.

H57, K21, D40

Abstract:
Recent research on central bank governance has focused mainly on their monetary policy task. As the sub-prime loan market turmoil reminded us - central banks play a crucial role in financial markets not only in setting monetary policy, but also in ensuring their soundness and stability. In this paper we study the specific corporate governance structures of a number of central banks in light of their complex role of inflation guardians, bankers' banks, financial industry regulators/supervisors and, in some cases, competition authorities and deposit insurance agencies. We review their current institutional arrangements, e.g. formal objectives, ownership, board and governor appointment rules, term limits and compensation, using both existing surveys and newly collected information; and we contrast them with the structures suggested in the corporate and public governance literatures, where present. Our analysis highlights a striking variety in central bank governance structures and a number of specific issues that appear unsatisfactorily addressed by existing research, including the incentive structure for governor and board members, the balance between central banks' multiple objectives, and the need for term limits or post-employment restrictions.

accountability, bank regulation, board structure, central bank independence, central banks, cooling-off periods, governance, governor remuneration, regulatory capture, term limits

Abstract:
The paper analyzes how cooperation in a repeated social game may help to sustain cooperation in a "linked" repeated production game. We show that this may happen a) because of available "social capital," defined as the slack of punishment power present in the social repeated game; b) because, when agents' utility functions are strictly concave in the outcome of the two games, a simultaneous punishment in the linked games turns out to be a stronger threat than the sum of the independent punishments in the two component games; and c) because the linkage between two repeated games may generate transfers of "trust."

Abstract:
This paper empirically investigates the effectiveness of competition policy by estimating its impact on Total Factor Productivity (TFP) growth for 22 industries in 12 OECD countries over the period 1995-2005. We find a robust positive and significant effect of competition policy as measured by newly created indexes. We provide several arguments and results based on instrumental variables estimators as well as non-linearities, to support the claim that the established link can be interpreted in a causal way. At a disaggregated level, the effect on TFP growth is particularly strong for specific aspects of competition policy related to its institutional set up and antitrust activities (rather than merger control). The effect is strengthened by a good legal system, suggesting complementarities between competition policy and the efficiency of law enforcement institutions.

Competition Policy, Productivity Growth, Institutions, Deterrence, OECD