On the Design of Leniency Programs

Leniency programs contribute to destabilizing collusion, however offering generous leniency might risk being exploited to perverse effects. This paper develops a simple model to resolve this trade-off in the design of leniency programs, which allows us to relate the optimal leniency policies to the frequency and effectiveness of investigations. We show that it is always desirable to offer some leniency before an investigation is launched, it is moreover optimal to keep offering leniency once an investigation is underway if investigations are less likely to succeed in uncovering cartels absent self-reporting. Our analysis also confirms the usefulness of restricting leniency to the first informant only; in contrast, it does not appear to support prohibiting leniency for repeated offenders. JEL Classification: L41, K21