Trust, Leniency, and Deterrence

TLDR

The study experimentally examines how law enforcement strategies deter cartel formation. The experiment shows that leniency with immunity makes high fines the primary deterrent, while distrust of partners drives deterrence; without leniency, detection probability and fines become more important, and low fines are used to punish defections, with implications for other cartel‑like crimes. JEL classification: C92, D03, K21, K42, L41.

Abstract

This article presents results from a laboratory experiment studying 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 to be mainly driven by "distrust"; here, the fear of partners deviating and reporting. Absent leniency, the probability of detection and the expected fine matter more, and low fines are exploited to punish defections. The results appear relevant to several other forms of crimes that share cartels' strategic features, including corruption and financial fraud. ( JEL C92, D03, K21, K42, L41.)