Optimal Fines in the Era of Whistleblowers. Should Price Fixers still Go to Prison?

• Pages: 81-122
• Date: 01 April 2007
• DOI: https://doi.org/10.1016/S0573-8555(06)82004-3
• Published date: 01 April 2007
• Author: Paolo Buccirossi,Giancarlo Spagnolo

CHAPTER 4

Optimal Fines in the Era of

Whistleblowers. Should Price Fixers still

Go to Prison?

Paolo Buccirossiaand Giancarlo Spagnolob

aLear—Laboratorio di economia, antitrust, regolamentazione

E-mail address: paolo.buccirossi@learlab.it

bStockholm School of Economics, Consip Research Unit, and CEPR

E-mail address: giancarlo.spagnolo@yahoo.it

Abstract

We review current methods for calculating fines against cartels in the US and

EU, and simulate their deterrence effects under different assumptions on the

legal and economic environment. It is likely that European fines have not had

significant deterrence effects before leniency programs were introduced. Previ-

ous simulations of the effects of fines ignore the different type of deterrence that

leniency programs bring about, and, therefore, grossly overstate the minimum

fine likely to have deterrence effects. With schemes that reward whistleblowers,

the minimum fine with deterrence effects falls to extremely low levels (below

10% of the optimal “Beckerian” fine). Strategic judgment-proofness can and

should be prevented by suitable regulation or extended liability. Criminal sanc-

tions, in the form of imprisonment, certainly bring benefits (and costs) in terms

of cartel deterrence, but the firms’ limited ability to pay does not appear any

longer such a strong argument for their introduction.

Keywords: antitrust, amnesty, cartels, collusion, corporate crime, debt, deter-

rence, extended liability, fines, law enforcement, leniency, immunity, imprison-

ment, judgment proofness, optimal fines, optimal sanctions, optimal liability,

organized crime, political economy, rewards, sunk cost bias, whistleblowers

CONTRIBUTIONS TO ECONOMIC ANALYSIS © 2007 ELSEVIER B.V.

VOLUME 282 ISSN: 0573-8555 ALL RIGHTS RESERVED

DOI: 10.1016/S0573-8555(06)82004-3

82 P.Buccirossi and G. Spagnolo

Yet another method of preventing crimes is, to reward virtue. Upon this subject the laws of

all nations are silent. If the rewardsproposed by academies for the discovery of useful truths

have increased our knowledge, and multiplied good books, is it not probable that rewards,

distributed by the beneficent hand of a sovereign,would also multiply virtuous actions. (Cesare

Beccaria, Of Crime and Punishment, Chapter 44: Of Rewards)

4.1. Introduction

The recent tendency towards the ‘criminalization’ of antitrust law in Europe,

started with the reforms in Ireland (1996) and UK (1999–2001), and the drastic

increase of jail terms for price fixing, introduced by the US Antitrust Crimi-

nal Penalty Enhancement and Reform Act in 2004, re-opened the never really

settled debate on optimal sanctions against cartels. This paper discusses the is-

sue in the light of two major recent innovations in the theory and practice of

law enforcement—leniency programs and reward schemes for whistleblowers—

whose novel type of deterrence effects could not have been taken into account

in the early debate on optimal antitrust sanctions, and has been largely neglected

in the current revival of that debate.1

In Section 4.2 we briefly review the evolution of the sanction policy adopted

in the EU and the US, and discuss the optimality of current financial fines in

the light of normative theory and available data. We simulate optimal financial

fines against cartels—the minimal ones that have deterrence effects—according

to the standard ‘Beckerian’ cost–benefit methodology used in previous work,

and argue that the sanctions imposed by the European Commission (and by the

competition authorities of many European countries) are likely to have been too

low, and to have had little deterrence effects before the recent introduction of

leniency programs and the parallel increase in fines. We suggest that pretending

to enforce cartel prohibitions may have been part of a ‘political equilibrium’

that pleased everybody,but (dispersed) consumers and tax-payers, and that is no

longer sustainable in a globalized world where developed countries that took a

tougher stance in favor of competition perform better.

In Section 4.3 we briefly review the main costs and benefits of using im-

prisonment against price-fixers, and argue that the current debate is based on

the wrong premises regarding the minimal size of corporate fines likely to have

cartel-deterrence effects on well informed firms. We produce simulations of the

minimum fines with cartel deterrence effects that take into account one of the

several new deterrence effects well designed and implemented leniency pro-

grams bring about, and we find that, by neglecting these effects, previous sim-

ulations are likely to have substantially overestimated such minimal fines. We

then produce simulations of the optimal fine with schemes that reward whistle-

blowers with the fines paid by the convicted partners, as proposed by Spagnolo

1See Rey (2003) for a brilliant and thorough discussion of the importance of implementation and

enforcement issues for competition policy in general and cartel deterrence in particular.

Optimal Fines in the Era of Whistleblowers 83

(2000a),Buccirossi and Spagnolo (2001),Kovacic (2001), and Aubert et al.

(2005), which have been successfully introduced in the last two decades by the

US False Claim Act against government fraud. We show that, with such pro-

grams, the optimal fine against cartels lies below firms’ normal ability to pay,

overcoming a first main concern expressed in support of the introduction of im-

prisonment for price-fixers (firms’ exogenous limited ability to pay).

In Section 4.4 we discuss the feasibility of schemes that reward whistleblow-

ers, and argue that with well-designed and well-implemented mechanisms, well

informed firms will have no reason to indemnify their managers fined for price-

fixing, nor to give them incentivesthat induce them to fix prices in the first place.

Given the change in the attitude of principals and the increased probability of

self-reporting these schemes induce, financial sanctions on individual managers

are also likely to become effective, alleviatinga second main concern in support

of imprisonment (indemnification of managers and their limited ability to pay).

We then discuss the possibility that firms strategically exploit bankruptcy

law, endogenously reducing their ability to pay antitrust fines by issuing large

amounts of debt that shield their assets, either because in some jurisdiction

debt may be senior to fines, or because in most jurisdictions courts and agen-

cies would not be willing to impose fines that drive firms bankrupt. Because

of this strategic judgment-proofness response on the side of firms, policies that

reduce fines for firms with lower ability to pay—often followed by courts and

agencies and openly suggested by some legal scholars—are likely to be highly

socially harmful: they both substantially reduce cartel deterrence, and generate

additional inefficiencies (over and above that of non deterred cartels) by induc-

ing colluding firms to distort their capital structure and undertake other cost-

increasing activities that increase their judgment-proofness. In the absence of

well-designed and well-implemented whistleblower schemes, it may be neces-

sary to limit overborrowing by firms, or to extend liability to otherstakeholders,2

or to let some firms go bankrupt because of the fines, or to fine directly control-

ling shareholders—waiving all fines on a bankrupt firm to allow new owners to

have a “fresh start”. Well-designedand well-implemented whistleblower reward

schemes would eliminate this problem at the root though, as the optimal fines

become so low that no judgment-proofness problem would emerge.

We then discuss how individual liability, leniency programs, and individual

rewards are likely to affect optimal fines; and howoptimal fines for corporations

change if managers are subject to the “Sunk Cost Bias”—as recent experimental

evidence suggests—and raise post-conviction competitive prices to try recover-

ing the fine.

Section 4.5 concludes with a brief summary of our main findings, some words

of caution, and a suggestion for further, highly needed, theoretical and empirical

research.

2Analogous remedies have been analyzed and proposed for the enforcement of tort law and envi-

ronmental regulation by Shavell (2004),Che and Spier (2005),andHiriart and Martimort (2005).