Nova workboard

a blog from young economists at Nova SBE

IN REPLY TO: “Cartel in financial products: What was the role of the EC Leniency Program?”

In his blog post Filipe Silvério is touching upon the most important function of the European Committee Leniency program: affecting the expected payoff scheme of colluding companies. The increase in the probability of getting caught is the main driver here, and I agree with Silvério that without the Leniency Program, regulators might not have known about existence of the discussed cartels. I assume the mentioned decrease in expected profits (as result of an higher detection probability) is based on the Leniency Model. Although the successes of this model, I also consider it to be important to look at the drawbacks and will complement Silvério’s blog post with two of them.

It is not always in companies their best interest to apply for leniency. An application for the program automatically gives a company the reputation of being involved in illegal activity. As Silvério starts his post: “Can I trust my bank?” This is a cost not taken into account in the Leniency model. On top of that, a company applying would have to come forward with every little thing that might be associated with antitrust activity. For example, when Barclays revealed the existence of a Euribor-cartel, but the EC would also find involvement with the Yen Libor-cartel, its leniency application could have been denied. (Wallace, 2010)

Another problem with the model referred to, is that it ignores the fact that the colluding firms have asymmetric information about the detection possibility. The detection possibility does not only depend on the effort of the regulator (which is ex ante known to all firms), but also on firm specific information available after the start of colluding. Self-reporting only occurs when the firm specific detection probability is high. According to Feess and Walzl (2004), the result of this is that having the possibility to self-report creates an option value that reduces the expected fine to be paid, and thus increases the payoff of colluding. This means that giving a self-reporting firm full immunity might not be without any costs.

To summarize, I agree with Silvério and acknowledge of the importance of the Leniency Program. Nonetheless, the underlining model faces some disadvantages. Indirect or non-monetary costs of self-reporting are not taking into account, and asymmetric information creates an option value that increases the pay-off scheme of colluding. These drawbacks should not be ignored when using or analyzing the model.

Stefanus Leeffers, 642

Link to Filipe Silvério’s blog post:

    Feess, E. and Walzl, M. (2004), An Analysis of Corporate Leniency Programs and Lessons to Learn for US and EU Policies, University of Maastricht.

    Wallace, K. (2010), To Cooperate Or Not: Obtaining Amnesty Under The DOJ’s Corporate Leniency Policy, American Bar Association.


Author: studentnovasbe

Master student in Nova Sbe

Comments are closed.