Law and Economics Approaches to Bid Rigging
New Horizons in Competition Law and Economics series
Chapter 2: Economic theory on optimal deterrence and enforcement
This section of the book presents law and economics insights into optimal deterrence and enforcement that are relevant for decisions taken by cartel members. From a law and economics perspective it is submitted that law essentially tries to set incentives (rules) so that people behave in a desirable manner. Economists are eager to provide the framework by which to determine whether legislators and administrative authorities succeed in setting incentives correctly so as to deter violations of the law in a cost-efficient way. To explain how people behave in relation to incentive structures created by law, Nobel Prize Laureate Gary Becker provides a simple model, according to which the expected costs for the offender should outweigh the potential benefits. According to this line of thought, whether firms choose to engage in unlawful competition that restricts activities depends on the associated costs of establishing and maintaining such practices and, of course, on the punishment incurred when found guilty of violating existing competition laws. If firms are assumed to act rationally, they will restrict competition when the total expected costs (the sum of probability of detection multiplied with the sanction) are lower than the anticipated benefits.
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