Divide et Impera: Optimal Leniency Programs

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.