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Buccirossi, Paolo; Spagnolo, Giancarlo (September 2005): Leniency Policies and Illegal Transactions. SFB/TR 15 Discussion Paper No. 74


Forthcoming in the Journal of Public Economics. We study the consequences of leniency – reduced legal sanctions for wrongdoers who spontaneously self-report to law enforcers – on sequential, bilateral, illegal transactions, such as corruption, manager-auditor collusion, or drug deals. It is known that leniency helps deterring illegal relationships sustained by repeated interaction. Here we find that - when not properly designed - leniency may simultaneously provide an effective governance mechanism for occasional sequential illegal transactions that would not be feasible in its absence.