Do Sanctions or Moral Costs Prevent the Formation of Cartel Agreements?

Abstract Cartel decisions are made by managers. These decisions result in an increase in company earnings at the expense of the earnings of a third party, typically consumers or business partners. Using laboratory experiments, this article studies the behavioral foundations of individuals’ willingness to engage in a cartel, in a context in which engaging in such agreements increases the cartelists’ earnings, but reduces the earnings of a third participant. This reduction in earnings is a loss for the third participant but it can also be seen as a moral cost for the cartelists. In addition, the impact of different sanctions schemes–monetary, leniency, compliance, and exclusion–is investigated. The results show that forced compliance and exclusion sanction schemes are more effective deterrents than monetary and leniency sanction schemes. These results are robust to varying levels of moral costs and of probabilities of detection and fines. Although the impact of moral costs is statistically significant, it is limited in magnitude, showing that participants are more sensitive to the monetary gains associated with cartel agreements than to the reduction in earnings imposed on the third participant. Finally, being a woman and being risk-averse is associated with a lower propensity to engage in such agreements.