Deterrence and Antitrust Punishment: Firms versus Agents

Abstract

Antitrust enforcement regimes rely on two types of penalties for deterrence: penalties against the violating firm and penalties against the agents of the violating firm. In this paper I examine the economics of punishing agents versus firms. My area of application is antitrust, but the argument applies generally to other fields in which the government has the choice between punishing the agent, the firm, or both. This analysis suggests that whenever the firm has an incentive, given existing penalties, to engage in some illegal act that may result in relatively modest punishment for its agents, it can almost always induce its agents to carry out the illegal act. It follows that almost any plausible effort to use penalties against agents to deter price fixing can be undone by the firm’s own system of rewards for agents. For deterrence, penalties against the firm sufficient to eliminate the firm’s incentive to fix prices are necessary.

Keywords: debarment, price fixing, antitrust penalties, optimal deterrence, compensation policy, antitrust enforcement

JEL Classification: K00, K21