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.