Do Discriminatory Leniency Policies Fight Hard-Core Cartels?

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This paper experimentally analyzes the effects of non-discriminatory and discriminatory leniency policies on hard-core cartels. We design a mechanism to form a hard-core cartel, which allows that multiple ringleaders emerge. Ringleaders of-ten take a leading role in the coordination and formation of hard-core cartels. A leniency policy which grants amnesty to all whistle blowers except for ringleaders may therefore reduce the incentive to become a ringleader and disrupt cartel formation. Yet, our experimental results show that whistle blowing rarely occurs. Paradoxically the discriminatory leniency policy induces firms to become ringleaders. We find that firms create trust among other firms when acting as ringleaders.This signaling effect ultimately facilitates coordination in the explicit cartel.