Silviase/jgov_v1.4_full_ann huggingface dataset:
to form a cartel and presumably have been effectively colluding, what has changed to induce one of them to discontinue collusion and apply for leniency? Understanding the incentives of a firm in such a situation is critical to developing an appropriate policy for inducing spontaneous reporting.

Several events come to mind that might induce a cartel member to defect and inform the authorities of the cartel’s existence in exchange for penalties being waived. A firm might experience a change in management (from those who had previously engaged in collusion) and the new management’s assessment is that collusion is not the right strategy. This could be because they determine it is unprofitable for the firm - the increase in profit doesn’t exceed the expected penalties - or they want to ensure that the previous management is assigned the liability of collusion as reflected in the accumulated penalties.

A second possibility is that collusion did not involve the highest level of management and collusion by these lower level managers has been discovered internally. If managers' compensation is contingent on performance, it may be in the best interests of these managers to collude with their counterparts at competing firms so as to improve their division's profit. However, the interests of the manager may not coincide with the interests of the firm. The manager is interested in increasing the division's profit in order to raise his compensation and thus fails to give adequate weight to the liability to the firm for penalties. In other words, these managers are being excessively rewarded because their superiors are unaware of the hidden cost to these higher profits. Once it is discovered, upper management may decide it is the best interests of the corporation to discontinue collusion in exchange for leniency.

One of the implicit costs of applying for leniency is the foregone profit from collusion. Hence, if, due to cost or demand shocks or entry, collusion becomes less profitable or collapses altogether than the incentive to go for leniency will be enhanced. $ ^{5} $ Finally, even if the profit from collusion has not fallen, the penalties from
being caught are steadily rising due to having colluded for a longer time. At some point, the accumulated liability in expected penalties may exceed the present value of the additional profit from colluding so that it is better for a firm to apply for leniency even though it means shutting down the cartel. $ ^{6} $

The incentives for applying for leniency can be quite different in these situations according to whether the event is private information to a firm or is instead common knowledge to cartel members. If the event is common knowledge then each firm may be concerned that the new circumstances may induce another firm to apply for leniency and, even though it might be content to remain quiet if all other firms do so, it may apply in order to preempt other members of the cartel. One is then in a waiting game that might turn into a race to report. Alternatively, if the change in circumstances is unique to a firm and is private information to it then that firm need not be concerned about being preempted. In weighing the option of going for leniency, the alternative is then continuing to collude without much concern that another firm will apply for leniency. In considering the events mentioned above, a reduction in the profitability of collusion or the accumulation of penalties are likely to be common knowledge to the cartel, while a change in management may or may not be. Internal discovery of collusion is likely to be private information. Thus, the incentive to report could be quite different across these circumstances.

When the antitrust authority does not suspect that a cartel may be operating, the concern from a policy perspective is that the incentives to apply for leniency are likely to be weak. Applying means foregoing collusive profit when the prospect of discovery - in the absence of one of the cartel members coming forward - is quite low. A firm that is contemplating such an application may see the alternative to doing so to be continued collusion without discovery. Hence, less important than the

Thus, cheating will ensure that the antitrust authority is informed of collusion and, in expectation, this raises the penalties. In other words, the chances of being convicted are higher when a firm cheats because of the leniency program and this can deter a firm from cheating and thereby make a cartel more stable and result in longer cartel duration.

$ ^{6} $ If this future time at which the cartel is no longer stable is predictable then, by a backward induction argument, this would cause collusion to be unstable from its inception.
differential between being first and second to report is the differential being first to report and no firm reporting. In that case, the absolute size of leniency - as opposed to the relative size of leniency from being first or second - is critical. Secondly, the act of applying for leniency can serve to inform the antitrust authority of the possible existence of a cartel so a firm wants to be sure that its application will be accepted. This argues to a generous policy of admitting the first firm into the program when the antitrust authority has no knowledge of collusion. An optimal policy is then likely to be one that is generous in terms of awarding leniency and in the amount of leniency. Fortunately, all programs have this property. When there is no knowledge of collusion (and thus no investigation), most programs have automatic awarding of leniency and leniency is maximal.

An example for which a leniency program appeared instrumental in inducing spontaneous reporting is the monochloroacetic acid cartel. Upon acquiring the Hoechst chemicals business, the management of Clariant discovered that the business was engaging in collusion. $ ^{7} $ The new management chose to inform the European and American authorities about the cartel. Without the benefit of avoiding penalties through the leniency program, it is quite possible that the new management would have discontinued collusion but not reported it to the authorities; thus allowing the other cartel members to escape punishment.

It is important to consider that maximal and automatic leniency may not be enough to induce use of the leniency program in many circumstances. As mentioned, the waiving of fines may not be sufficient when it means forgoing collusive profit and the probability of the antitrust authority discovering the cartel is low. But the incentives against applying for leniency may be even greater once one considers the implications for the company employees that actually come forward. Even if the corporation avoids fines, are those employees' careers affected? Do they suffer monetary and non-monetary penalties within the firm? Are their bonuses reduced? Are their chances for promotion harmed? Are they fired? Is their career in this
industry terminated? $ ^{8} $ There are then a variety of reasons to think that simply waiving all fines may be inadequate to induce usage of a leniency program when the authorities are unaware of collusion. We should then consider more generous programs to induce use of the leniency program under such circumstances. In this spirit, Spagnolo (2003) proposes and theoretically analyzes a program that would provide a financial reward (in addition to waiving all fines) to the first firm to receive leniency with the reward being financed by the fines collected from the other cartel members.

Finally, it is important to recognize that the evidence on spontaneous reporting through leniency programs is not well-documented. It is unclear to what extent firms do apply for leniency when the antitrust authority lacks any suspicion that a cartel exists. If leniency programs are really to be an instrument for cartel detection, as opposed to aiding prosecution, it is critical that we better document how discovery occurs and better understand why a firm, after effectively colluding for some length of time, would choose to apply for leniency. These are directions for future analysis.

#### 2.2.2 The Pre-Investigation Phase (with Suspicion of Collusion)

Now consider a scenario in which the antitrust authority has some knowledge that there may be or is a cartel but has not yet launched an investigation. In contrast to the previous scenario, plausible alternative outcomes to a firm that contemplates applying for leniency are being preempted by another firm or the antitrust authority launching an investigation before it applies for leniency. This is then a waiting game that can change into a racing game. An important role for policy - both design and implementation - is inducing firms to stop waiting and start racing.

In that situation, with the cartel having been discovered, the primary objectives are to cause the cartel to collapse and to maximize expected penalties in order to deter future collusion in this and other industries. The trade-off associated with a leniency program is simple enough. Offering leniency lowers the penalty received by
the firm that receives it; a firm is going to apply for leniency only if expects to pay lower fines from doing so. This expected reduction in penalties has the unfortunate implication that it can promote collusion as, when forming a cartel, firms recognize that they may be able to avoid some penalties if they are discovered in the future. On the other side of the ledger is that offering reduced penalties to one cartel member in exchange for their testimony can raise, in expectation, the penalties that are collected from the remaining cartel members; this tends to discourage collusion. Ultimately, one wants a leniency program to be designed so that, on net, expected penalties rise - the reduction in penalties from those firms that receive leniency is exceeded by the rise in expected penalties that don’t get it.

One important dimension of a corporate leniency program that is pertinent to this analysis is the differential between being first to receive leniency and being second. The U.S. policy maximizes this differential in order to encourage a race among the cartel members; it offers maximum leniency to the first firm and no leniency for later firms. In contrast, both Japan and the E.U. provide partial leniency to the second and third firm. However, as noted earlier, this difference is not as extreme as it appears because the U.S. implicitly offers partial leniency through plea bargaining. Though, after a firm is accepted into the corporate leniency program, the DOJ is not committed to providing other cartel members with lower penalties in return for the provision of evidence and accepting a guilty plea, in practice it has the discretion to do so and indeed does so. By way of example, consider Hoffman LaRoche in the vitamins price-fixing case. According to the DOJ's sentencing guidelines, the fine should have fallen in the range of 1.3 to 2.6 billion dollars and, it should be added, there is already a lot of discretion in setting these bounds. The DOJ negotiated a fine of $500 million which, while an impressively large penalty, was less than 40% of the lower bound!

Reducing the differential between being first and second into the program obviously weakens the incentive to be first and thus may make firms more inclined to wait; thereby reducing the probability of a race and any firm coming forward. Furthermore, one is reducing expected penalties further by offering leniency to more firms. If
there is a benefit in doing so it lies in the importance of having additional witnesses for prosecuting the remaining members of the cartel. The first witness surely has great value, especially when it delivers concrete evidence. A second witness can also be quite valuable for without them (or concrete evidence), it may come down to one firm saying there was a cartel and the remaining firms claiming the contrary. Such a situation may not lead to a conviction. But what does a third insider witness add to the prosecution's case? Do they really deliver value? This ought to be carefully investigated because providing leniency to them only encourages firms to wait and hold off reporting and, in addition, reduces expected penalties and thus promotes cartel formation. Ultimately, it is an empirical question as to what is the right amount of partial leniency and how many firms ought to be eligible for partial leniency.

A second key dimension in which leniency policies differ is the extent to which they promote a race between the cartel members and the antitrust authority. In the U.S., maximal leniency can be received whether or not an investigation has begun. Indeed, DOJ officials have expressed that the possibility of receiving leniency after an investigation has begun was an instrumental feature of the 1993 revision. In contrast, Japan creates a race with the antitrust authority by significantly reducing the amount of leniency after an investigation has begun. The appeal I see here is that it creates the possibility that the antitrust authority can actively "manage" the waiting/racing game. Furthermore, a waiting/racing game between cartel members and the antitrust authority may be quite complementary with the waiting/racing game among cartel members. Through its decision as to when to launch an investigation, an antitrust authority may be able to compress and intensify the race among cartel members. These points I'll address more fully when I discuss the implementation of a leniency program.

#### 2.2.3 The Investigation Phase

Now we come to the third scenario. The antitrust authority has launched an investigation and would like to induce firms to come forward in order to provide evidence to help the prosecution’s case against the remaining cartel members and conserva-
ing scarce government resources. The calculus is much the same as with the Pre-Investigation phase except that the probability of conviction - without an insider witness - is likely to be higher. A firm needs to weigh its payoff from applying now or waiting and possibly being preempted by another firm.

It is here that the policies of the U.S. and Japan differ the most. The U.S. continues to provide incentives to encourage a race among firms since maximum leniency can still be received by the first firm. On the other end of the spectrum, Japan provides little leniency - only 30% of fines are waived - and there is no difference between being first, second, and third. The E.U.'s policy lies between them. Which policy is right depends on how likely is a conviction without an insider witness, which itself depends on how strong is the antitrust authority's case when it launches an investigation. If the probability of conviction is typically relatively low then one needs to provide a strong incentive to induce a firm to come forward. In that case, the U.S. policy seems appropriate. If instead the antitrust authority's case is typically strong then weak incentives, such as with the Japanese policy, may be sufficient to induce firms to enter the program. (Of course, if the case is strong then there is much less of a reason to provide leniency in exchange for evidence.) The appropriateness of the policy then depends on the expected strength of the antitrust authority's case at the time the investigation is launched.

I have additional concerns about the Japanese policy in the Investigation phase. First, is a 30% reduction sufficient to induce a firm to come forward? It would seem that a (risk-neutral) firm would not do so unless the probability of conviction is at least 70% which is rather high if no firm has yet admitted guilt. $ ^{9} $ Here, it is worth noting that an investigation starts when the JFTC conducts a raid of a company to secure evidence of collusion. As an investigation then begins relatively late in the process for the case of Japan, it may indeed be that the probability of conviction is sufficiently high so as to induce firms to use the leniency program in spite of the low fraction of fines that are waived. Time will tell whether 30% is sufficient. Second,
the lack of a differential in leniency in being first or second or third weakens the race among cartel members during the Investigation phase; it is the differential between being early and late to the authority’s office that will create a race. To see this most clearly, suppose a cartel has only two or three firms and conviction seems unlikely unless a firm comes forward. If an investigation is in place, what is the incentive to report? A firm can simply wait and see if another firm reports and, if one does, then report itself. There would seem to be little risk in waiting and this may neutralize the race among cartel members and potentially result in no firm applying for leniency.

#### 2.2.4 The Omnibus Question

In conclusion, there is one notable feature to the U.S. program that deserves special attention. This is the Omnibus Question which is arguably the most important tool the DOJ has for discovering collusion. At the conclusion of a witness interview under the leniency program, the DOJ asks: "Do you have any information whatsoever, direct or indirect, relating to price-fixing, bid rigging, etc. with respect to other products in this industry or in any other industry?" Failure to answer the question truthfully means a loss of amnesty. This appears to be an important method of detection for the DOJ as exemplified with the sodium gluconate cartel which was revealed by defendants in the lysine and citric acid investigations (First, 2001).

I would argue that the power of the Omnibus Question lies with the incentives it creates for the individual manager rather than the corporation. This employee - having been involved in collusion - is likely to no longer have a position at this company or, at a minimum, is unlikely to have much of a future there. Individual interests may not be well-aligned with company interests. Though revealing the company is colluding in some other markets may cause additional financial harm to the company, this employee is apt to be much more concerned with jeopardizing the amnesty they’ve received from prison sentences and individual fines. Having already revealed their part in collusion, I suspect there is a strong incentive to avoid perjury and tell all to the authorities. The Omnibus Question can then be a powerful tool for cartel detection.