The effect of whistle-blowing incentives on collusion: an experimental study of leniency programmes

Nick Feltovich and Yasuyo Hamaguchi

Policy makers are increasingly using whistle-blowing incentives aimed at curtailing illegal or unethical behaviour. We theoretically and experimentally investigate one version of whistle-blowing incentive: leniency programmes aimed at curbing anti-competitive activities by firms, by reducing the punishment faced by a cartel member who reports the cartel's behaviour. The theoretical model captures the two important effects of whistle-blowing incentives: the direct effect, a reduction in the stability of cartels, and the counterproductive indirect effect, an increase in the incentives to form cartels in the first place by lowering the cost of exiting them. As these point in opposite directions, the net theoretical effect is indeterminate. Our laboratory experiment compares two leniency programmes - full immunity from fines and partial immunity - against a baseline with no whistle-blowing incentives in place. We find evidence of the direct effect but not the indirect effect, and thus both programmes reduce the extent of price fixing and the damage associated with it.

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