Trust and Deterrence

Abstract

This paper presents results from a laboratory experiment on the channels through which different law enforcement strategies deter cartel formation. With leniency policies offering immunity to the first reporting party a high fine is the main determinant of deterrence, having a strong effect even when the probability of exogenous detection is zero. Deterrence appears then mainly driven by 'distrust', the fear of partners deviating and reporting. Absent leniency, the probability of detection and the expected fine matter the most, and low fines are exploited to punish defections. The results appear relevant to several other crimes sharing cartels' strategic features, including corruption and financial fraud.

Keywords: Antitrust, Betrayal, Cartels, Collusion, Distrust, Fines, Leniency, Whistleblowers

JEL Classification: C92, D03, K21, K42, L41