Silviase/jgov_v1.4_full_ann huggingface dataset:
Of course, in Japan, the lack of individual penalties means this logic is not obviously applicable. Furthermore, it is unclear what the employee's status would be within the company. It may still be true that the employee's future in the company depends on protecting the company's collusion in other markets. Nevertheless, the Omnibus Question could be effective if it puts an employee in the position of risking perjury by not revealing their knowledge of collusion in other markets. In that case, individual penalties are present so there might still be that powerful incentive to reveal all. In any case, developing policies to promote the discovery of other markets in which a firm is engaged in collusion is critical. As is well-documented, recidivism of this sort is common. For example, since 1990, Mitsubishi has been sanctioned or is under investigation for colluding in ten distinct markets that range from graphite electrodes to fax paper, while Takeda Chemicals has been involved in eight cartels (Connor, 2003).

## 3 Implementation of a Corporate Leniency Program

The effectiveness of a policy can be sensitive to how it is implemented. In this section, I discuss three issues related to implementation: i) predictability of a corporate leniency program; ii) timing of an investigation; and iii) advertising to influence expectations of firms.

### 3.1 Predictability

DOJ officials have emphasized that the application process should be transparent and predictable. This is clearly important and especially if firms are to apply for leniency when the antitrust authority lacks any knowledge of collusion. I don’t have much to add to that point other than to say that the antitrust authority can still be rather stringent in requiring that a firm fully cooperate if it is to receive leniency. Denying or revoking leniency due to lack of cooperation need not disrupt the predictability of the process. What is important is that firms believe it is within their control to receive leniency. If they realize that if they provide substantive evidence and fully
cooperate that they will receive leniency then that should be enough.

An issue that has been less discussed is the predictability of fines. The prospect of leniency impacts behavior only to the extent that a firm has a reasonably good idea of how much it’ll save in fines. This is a relatively straightforward matter when leniency is full - then all penalties are waived - but can be problematic when leniency is partial. The partial leniency system under the E.U. system has considerable uncertainty attached to it as regards fines (for details, see Geradin and Henry, 2005). There is uncertainty as to both the base fine and the percentage of fines to be waived. The latter may be justified on the grounds that how much leniency is offered ought to depend on the extent to which a firm provides evidence that advances the antitrust authority’s case. The case for leaving the extent of fines up for discretion is not so obvious. And if the antitrust authority has considerable discretion as to setting the base fine then what does it mean to have, say, 50% of fines waived? An antitrust authority that wants to assess 10 million Euros in fines can either make the base fine 20 million Euros and award leniency of 50% or make the base fine 12.5 million Euros and award leniency of 20%. While that may be a caricature of what is in place, the point is that discretion over the base fine increases a firm’s uncertainty over what is gained by applying for partial leniency.

In comparison, the JFTC seems to have a system that is more predictable in that the fine is a percentage of turnover or sales. Though focusing on the incremental profit from collusion rather than firm revenue would go more to influencing incentives in the right way (as is done with private damages in the U.S.), estimating the additional profit due to collusion is difficult as it involves coming up with a "but for" price (which is the price that would have occurred had it not been for collusion). $ ^{10} $ That is a difficult, contentious, and unpredictable exercise. Having the penalties proportional to sales is more straightforward, easier to implement, and more predictable.

However, is unpredictability of the amount of fines bad? It would seem so on at least two grounds. First, managers are likely to be risk averse and an appealing
key feature to a predictable leniency program is that it provides a less risky option. Applying for leniency means paying a modest fine for sure compared to the lottery associated with not applying in which case the firm either pays no fine - if it is not convicted - or incurs a high fine - if it is convicted. The more unpredictable is the amount of fines under leniency, the smaller is the reduction in risk from applying for it. Second, the intent of a leniency program is for the antitrust authority to influence the cost-benefit calculation faced by firms and manipulate it so as to induce them to come forward with evidence. The more uncertainty there is in applying for leniency, the more managers' behavior is based on their own subjective beliefs and thus the less control the antitrust authority has over that cost-benefit calculation. Finally, there is the advantage to the antitrust authority having less ex post discretion over the setting of fines in that it is committed to imposing harsh penalties even if it requires using a lot of prosecutorial resources. When given discretion, an antitrust authority may be tempted to agree to lower penalties in order to close the case and move onto another one. Though there can be merit to such an action, if cartel formation is to be deterred it'll be because of the severity of the penalties. Committing the government to fight to impose high penalties may better serve the long-run objective of deterring cartel formation.

### 3.2 Timing

Returning to the three scenarios described earlier, it would seem - under the Japanese leniency program - that the most critical role for an antitrust authority is during the Pre-Investigation stage. The differential between being the first to report and doing so prior to rather than after an investigation has begun is large; the difference is 70% of fines. The Pre-Investigation phase - the time between when the JFTC suspects collusion and when it starts a formal investigation - should then not be pre-determined according to some regimented procedure but rather strategically timed to encourage firms to come forward.

What is the best manner in which to "manage" this phase? To begin, if the antitrust authority is suspicious then it should consider revealing these suspicions.
prior to beginning an investigation. If firms assign a relatively low probability to conviction when they believe the antitrust authority is unaware of collusion then the applications for leniency are unlikely to occur unless firms know the antitrust authority has some knowledge that there may be a cartel. And, once an investigation is begun, the incentives for applying for leniency are weak since only 30% of fines are waived and there is no differential between being first, second, and third. The cost to that strategy is that it may give the cartel members the opportunity to destroy incriminating documents. To what extent such documents routinely exist may then determine which approach is better.

Rather than simply wait for firms to come to them for leniency, the antitrust authority may want to approach individual cartel members and encourage them to enter the program. This has several advantages. First, it can influence which firm receives leniency. In particular, it makes sense to approach smaller firms because fewer fines are waived and, more importantly, higher (proportional) penalties for bigger firms is desirable because they are more likely to have initiated and organized the cartel. Less anticipated leniency for the initiator of a cartel will help discourage future cartel formation. Second, if each firm knows the antitrust authority approaches a firm in private, it can help sow suspicions among the cartel members. A firm that is not approached by the antitrust authority may be concerned that it is talking with another firm about entering the leniency program and that concern may induce it to come forward first.

The timing of an investigation could be an effective instrument in encouraging firms to apply for leniency. Recall that cartel members are in a waiting game; each is holding off applying for leniency because the other firms are currently doing so, but at anytime a firm could decide that other firms are about to apply in which case it races to preempt them. The antitrust authority should try to shift firms' expectations about other firms' behavior so as to transit firms from waiting to racing. Hence, the Pre-Investigation phase shouldn't be too short as one wants to give firms enough time to "sweat it out" and develop concerns about being preempted. The antitrust authority may even want to pre-announce the timing of an investigation. By pre-
announcing the start date, firms realize it is now or never to get full leniency and, just as important, they realize that all other firms know it is now or never. As the time approaches until an investigation, there is apt to be a strong temptation to apply out of fear that other firms are preparing to do so.

### 3.3 Advertising

As mentioned, a critical task is to alter firms' expectations. If a cartel member thinks that detection and conviction is likely then it'll be more inclined to apply for leniency. If a cartel member thinks that another member is likely to apply for leniency then it'll be more inclined to apply for leniency and preempt it. What can the antitrust authority do to move beliefs in this direction? It can advertise - remind firms that the antitrust authority is watching, that fellow cartel members may use the leniency program, that the antitrust authority has caught price-fixers. The antitrust authority can appear at trade association meetings, continually remind managers about the corporate leniency program, and advertise the program's successes. On the latter point, spillovers of an analogous variety have been documented. In the case of the market for white pan bread, price-cost margins fell for cities in a region for which the DOJ had filed an action that year in some other city in that same region (Block et al, 1981). This suggests that filing an action in one market may induce firms to stop colluding in other markets. The antitrust authority can magnify that process by actively disseminating information. Such activities could be highly complementary to the incentives created by a corporate leniency program.

## 4 Measurement of the Effect of a Corporate Leniency Program

Having instituted a corporate leniency program, it is critical that we measure its impact. What has worked and what has not? How can it be improved? If we measure impact by usage then the 1993 revision in the U.S. clearly made a difference. Usage rose significantly as the rate of leniency applications jumped more than 20-fold.
from about one application per year to about two per month. A similarly striking rise occurred in the E.U. with the 2002 revision of the original program put in place in 1996.

To what can one attribute this rise in usage? In the case of the U.S., James Griffin - who, at the time, was the Deputy Assistant Attorney General at the DOJ - emphasized three changes: i) amnesty is automatic if there is no pre-existing investigation; ii) amnesty may still be available even if cooperation begins after the investigation is underway; and iii) all officers, directors, and employees who cooperate are protected from criminal prosecution. He probably should have also mentioned the increase in government fines due to the revision of the Federal Sentencing Guidelines in 1991.

While the DOJ continues to receive many leniency applications, at the same time cartels keep forming. The DRAM cartel - another major prosecutorial success for the DOJ - was formed in mid-1999. This is after the leniency program was used in the successful prosecution of cartels in the markets for lysine, graphite electrodes, and vitamins.

This leads us to a more basic question: Should we interpret the rise in usage as success? If all firms were to receive maximal leniency regardless of the circumstances then usage would surely go up but to what extent have we just provided a good deal for price-fixers? So, what do we mean by success? Success should be measured by the degree to which the rate of collusion in the economy is reduced. An absence of applicants to a leniency program can then be consistent with success - if it is due to there being no cartels - while a high rate of applications can be consistent with failure - as there are many cartels and leniency is attractive to colluders. We'd like a leniency program to increase the probability of successful prosecution, increase the probability of detection, makes cartels less stable and thereby reduce cartel duration, and reduce the rate of cartel formation.

It seems clear that corporate leniency programs in the U.S. and E.U. (and elsewhere) have been instrumental in the prosecution of cartels. Perhaps exemplifying this point is the graphite electrodes industry. The European Commission opened an investigation in 1983 in response to some information that there was a cartel among
the manufacturers of graphite electrodes. $ ^{[11]} $ The file was closed three years later due to lack of evidence. Maybe there was not a cartel or maybe there was and the cartel members were effective about hiding evidence and none admitted to it. Indeed, why should a firm have admitted to it? What would it have gained by doing so? The story was quite different when the industry was investigated again in 1997. This time one of the manufacturers applied for leniency and cooperated with the authorities. The investigation was successful with fines imposed of almost 220 million Euros. There are surely many cases in which use of the leniency program "broke" the case and thus was highly instrumental in prosecution.

Unfortunately, there is a fundamental data problem when one turns to assessing the impact of a corporate leniency program on the rate of collusion. To measure the efficacy of a leniency program, one needs to observe the population of cartels. However, since collusion is illegal, cartels hide themselves. As a result, we do not observe the population of cartels but rather the population of discovered cartels. To see what kind of difficulties this creates, consider trying to measure the effect of a corporate leniency program on the frequency of cartels. Suppose, in actuality, the policy results in a higher rate of discovery. Holding fixed the number of cartels, we ought to then see more discovered cartels. The problem is that the number of cartels is not fixed. It may change for exogenous reasons but, even more relevant, it may change because the leniency program is working. If the program is resulting in a higher rate of discovery - along with higher expected penalties - this can cause marginally stable cartels to collapse and some cartels not to form; this means fewer cartels. An efficacious leniency program is then raising the rate of discovery but reducing the number of cartels so the net effect on the number of discovered cartels is ambiguous. A leniency program could then be having a substantive effect on cartel formation, yet there is no measurable impact on the rate of discovered cartels. Alternatively, the lack of a measurable change in the rate of discovered cartels may just reflect the program is not working. And if the rate of discovered cartels rises,
this could be because the program is working or it is actually making collusion easier - since leniency reduces penalties (and I noted one argument for how leniency may enhance cartel stability) - and more cartels are being discovering because there are more cartels in the economy.

To make this point more concretely, the number of cartels convicted by the European Commission rose from 2.5 per year over 1990-95 to 4.75 during 1996-2003 (Brenner, 2005). To what can we attribute this rise? Is it because the corporate leniency program instituted in 1996 made discovery and prosecution easier? Is it because the integration within the E.U. opened up markets, intensified competition, and thereby induced more cartels to form? It just isn’t clear what we can infer from a higher rate of conviction.

This poses a major challenge to learning the effectiveness of new policies. What is needed is research to develop methods for indirectly measuring the impact of antitrust policies on the rate of cartel formation and the discovery of cartels. I have engaged in some preliminary work along these lines and have the tentative finding that cartel duration may serve as a yardstick for assessing the impact of a policy change (Harrington, 2005). An anti-cartel policy that is effective may reflect itself in the duration of discovered cartels. More specifically, if the program is working then we ought to observe, in response to the policy change, that cartel duration goes up in the short-run but down in the long-run. The explanation is as follows. In response to a more aggressive and efficacious policy, cartels with traits that make them marginally stable (for example, volatile demand, many firms, threat of entry) will collapse on their own since the policy chance now makes collusion unprofitable. The surviving population of cartels is then comprised of relatively more stable cartels and, by virtue of being more stable, have higher duration. In response to the policy change, the duration of (surviving) cartels is then higher. When these cartels are discovered, one then observes higher cartel duration. In sum, the duration of discovered cartels goes up if the new policy is effective because it has induced marginally stable cartels (which necessarily have shorter duration) to collapse and thus avoid discovery. In the long-run, the distribution on cartel duration will converge to the new stationary
distribution which entails shorter cartel duration since all cartels are relatively less stable by virtue of this more aggressive policy. An important challenge for scholars is to develop indirect methods for measuring the impact of antitrust policy. Otherwise, we’ll be flying blind when it comes to designing policy and assessing what works and what does not.

## 5 Expanding the Set of Agents Induced to Report

Leniency programs are all about inducing those with the best information about collusion - the cartel members themselves - to come forward and cooperate. In this spirit, it makes sense to think about how to induce other agents who might have some information to report their suspicions to the authorities. Three sets of agents come to mind: i) buyers; ii) employees of the colluding firms who are not themselves participating in the conspiracy; and iii) competing firms who are not members of the cartel. Due to their proximity to the cartel, all these agents may have information that could lead them to suspect a cartel has formed.

### 5.1 Buyers

In many cartels, the buyers are not final consumers but rather industrial buyers. For example, Tyson Foods purchased vitamins from colluding firms such as Hoffman LaRoche and BASF. As industrial buyers will have very good information on the time series of prices, they witness the change in price due to collusion. If firms start steadily raising prices, a buyer may become suspicious, especially when there do not appear to be cost and demand factors to rationalize the price increases. Or a buyer, in response to a higher price from their usual supplier, notices that another supplier is no longer willing to bid for their business or offers a bid that is ridiculously high. Such behavior could emerge from a customer allocation scheme and similarly might make buyers suspicious that firms are coordinating their behavior. Or they might notice that firms' price changes are much more coordinated than they were in prior years; perhaps now firms change their prices within a few days of each other, where before it occurred
over a longer period of time. Even if buyers are not particularly sophisticated and not consciously looking for collusion, sufficiently inexplicable behavior or behavior sufficiently out of line with the past may create suspicions.

If a buyer does suspect, wouldn't they necessarily report it to the antitrust authorities? And, in that case, what is the need for policies designed to further encourage it? Might it induce them to report every time price rises? Indeed, there are strong benefits from reporting suspected collusion. Buyers can benefit from lower input prices if the cartel is dismantled. Furthermore, in the U.S., the prospect of collecting damages for past collusion can be a strong financial reward to report suspected collusion. $ ^{12} $ And there have been documented cases of it. The European Commission investigated the stainless steel industry (and found collusion) because buyers complained to the Commission about a sharp increase in prices. Though we do not know the specifics of their complaints, reportedly the cartels in graphite electrodes $ ^{13} $ and thermal facsimile paper $ ^{14} $ were also begun because of buyer complaints.

However, there may be costs to reporting that offset lower input prices. Due to the incompleteness of contracts, any business relationship is built upon a certain amount of trust and cooperation. That trust could be harmed if a buyer "turned in" a seller. Sellers may also choose to retaliate to discourage future reporting. This could be done by limitations on supply, less preferential treatment when inventories are low, and discriminatory pricing. To weaken incentives more, some buyers might be better off with higher input prices as it can give them an advantage over their competitors. For example, a firm that has a technology that uses less of this input will experience a relative cost advantage when the price of the input is raised. While
its cost rises, the cost of its competitors rises more. In that case, a firm could find their profit higher under collusion. Though this can't be true for all input buyers, it could be true for some in which case they do not have an incentive to report their suspicions about collusion to the authorities. Of course, by the same argument, the firms that are put at a cost disadvantage now have an accentuated incentive to report if they think collusion is behind the rise in input prices.

Even if the buyers do have an incentive to report their suspicions, if it is costly to do so - for example, a buyer has to pull together the evidence and make a convincing case to the antitrust authority - then, due to a free rider effect, this will tend to be underprovided. A buyer who reports and causes the collapse of the cartel will benefit all buyers as all will be better off with lower prices; yet only that buyer incurs the cost. This means that there will be an underprovision of investigatory services performed by buyers.

It is then not entirely clear that buyers, who are first-hand witnesses to what is happening with prices, have sufficiently strong incentives to report suspicions about collusion. If one feels comfortable "rewarding" a cartel member for coming forward under the leniency program by waiving fines, it should not be difficult to accept the idea of rewarding an input supplier (or any party not part of the cartel) who provides valuable information with financial rewards. This could be considered at both the individual level - an employee of the company buying inputs from a cartel - and the corporate level - the company for which that employee works. Such a reward scheme might also replicate the financial benefit in the U.S. from customer damages and that system is thought to be fairly effective.

### 5.2 Uninvolved Company Employees

A second set of individuals who are apt to have relevant information are employees of a colluding firm who are not themselves engaged in the collusion. When coordination is taking place among upper level management, which has proven to be the case with many global cartels, sales representatives will be uninvolved yet have relevant information. Like the input buyers, they witness the change in prices and indeed