Do Sanctions or Moral Costs Prevent the Formation of Cartel-Type Agreements?
35 Pages Posted: 9 Feb 2023
Date Written: February 9, 2023
Cartel decisions are made by managers. These decisions result in an increase in the company earnings at the expense of the earnings of a third party, typically consumers or business partners. Using laboratory experiments, this article studies the behavioral foundations of individuals’ willingness to engage in such cartel-type agreements in a context in which engaging in such agreements increases the cartelists’ earnings but reduces the earnings of a third participant. This reduction in earnings is a loss for the third participant but it can also be seen as a moral cost for the cartelists. The impact of sanctions – monetary, leniency, compliance, and exclusion – is investigated in a within-subject design and the impact of moral cost is tested in a between-subject design and at various levels of moral costs, which also allows us to test the robustness of the effects of sanction schemes in these different moral cost conditions. The results show that compliance and exclusion sanction schemes are vastly more effective deterrents than monetary and leniency sanction schemes. These results are robust to varying levels of moral costs, but also to varying levels of probabilities of detection and fines. Although statistically significant, the moral cost has an impact but its magnitude is limited, showing that participants are mainly sensitive to the monetary gains associated with cartel-type agreements and less sensitive to the reduction in earnings imposed on the third participant. Finally, being a woman and being risk-averse is associated with a lower propensity to engage in such agreements.
Keywords: Antitrust, cartel, fraud, moral behavior, sanctions
JEL Classification: C91, K21, K42, L41, M12
Suggested Citation: Suggested Citation