The effect of leniency programs on endogenous collusion

- The effect of leniency programs on collusion is studied.
- This model extends the previous literature in two ways.
- First, the collusion degree depends on the detection probability.
- Second, the equilibrium selection in the reporting stage is endogenized.
- We reveal that the maximum reduction is the best policy without any condition.

The objective of a leniency program is to reduce sanctions against collusion if a participant voluntarily confesses his behavior or cooperates with the public authority's investigation. Constructing a model in which the detection probability varies over time, Harrington (2008) pointed out that there are three channels through which the leniency program can affect the collusion amount; furthermore, he presented a sufficient condition under which the maximum leniency is optimal. After extending the model by endogenizing the degree of collusion as well as equilibrium selection in the self-reporting stage, we revealed that the Race to the Courthouse effect disappears and that the maximum reduction is always optimal.