Prosecution and leniency programs: the role of bluffing in opening investigations

This paper characterizes the optimal investigation and leniency policies when the Competition Authority is privately informed about the strength of a cartel case. I show that the Competition Authority can then exploit firms’ uncertainty about the risk of conviction to obtain confessions even when the case is weak. More generally, I show that offering full leniency allows the Competition Authority to open more successful investigations (what I refer to as the ‘activism effect’ of leniency), which overall raises both cartel desistance and cartel deterrence. Finally, I discuss the policy implications of the model.