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

SSE/EFI Working Paper Series in Economics and Finance No. 696

22 Pages Posted: 20 May 2008  

Maria Bigoni

University of Bologna - Department of Economics

Sven-Olof Fridolfsson

Research Institute of Industrial Economics (IFN)

Chloe Le Coq

SITE-Stockholm School of Economics

Giancarlo Spagnolo

Stockholm School of Economics (SITE); Centre for Economic Policy Research (CEPR); University of Rome 'Tor Vergata'; EIEF

Date Written: March 31, 2008

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.

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

JEL Classification: C92, D43, D81

Suggested Citation

Bigoni, Maria and Fridolfsson, Sven-Olof and Le Coq, Chloe and Spagnolo, Giancarlo, Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence from an Antitrust Experiment (March 31, 2008). SSE/EFI Working Paper Series in Economics and Finance No. 696. Available at SSRN: https://ssrn.com/abstract=1134745 or http://dx.doi.org/10.2139/ssrn.1134745

Maria Bigoni

University of Bologna - Department of Economics ( email )

Piazza Scaravilli 2
Bologna, Bologna 40126
Italy
+390512098134 (Phone)

HOME PAGE: http://https://www.unibo.it/sitoweb/maria.bigoni/en

Sven-Olof Fridolfsson

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Chloe Le Coq

SITE-Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

HOME PAGE: http://www.hhs.se/SITE/Staff/Pages/ChloeLeCoq.aspxl

Giancarlo Spagnolo (Contact Author)

Stockholm School of Economics (SITE) ( email )

P.O. Box 6501
Stockholm
Sweden

HOME PAGE: http://https://sites.google.com/site/giancarlospagnoloshomepage/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

University of Rome 'Tor Vergata' ( email )

Faculty of Economics - DEI
Via Columbia 2
Rome, RM 00133
Italy

EIEF ( email )

Via Due Macelli, 73
Rome, 00187
Italy

HOME PAGE: http://WWW.EIEF.IT

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