Support 100 years of independent journalism.

  1. Business
24 July 2012

Will a company break the law? It’s simple economics

Instances of corporate crime follow a clear cost:benefit pattern.

By New Statesman

Some research published in the Economist’s Free Exchange column looks at recent antitrust behaviour in companies and finds that whether a company breaks the law has much more to do with simple economics than the morals of their CEO.

Instances of crime followed a clear cost:benefit pattern – if the odds of getting caught were too low or the punishment too light, breaking the law started too look far more attractive.

The column looked at cartels that operated between 1990 and 2005, and measured gains against potential penalties:

The first step is to measure the expected gain from crime which fines need to offset. In the study by Messrs Connor and Helmers, the median amount that cartel members overcharged was just over 20% of revenue in affected markets.

Next, you need an assumption about the chances of being found out: a detection rate of one cartel in three would mean trustbusters were doing well. In this example, that would mean a fine of 60% of revenue is needed to offset an expected benefit of 20% of revenue — far higher than the fines in the study, which were between 1.4% and 4.9%.

Sign up for The New Statesman’s newsletters Tick the boxes of the newsletters you would like to receive. A weekly newsletter helping you fit together the pieces of the global economic slowdown. Quick and essential guide to domestic and global politics from the New Statesman's politics team. The New Statesman’s global affairs newsletter, every Monday and Friday. The best of the New Statesman, delivered to your inbox every weekday morning. The New Statesman’s weekly environment email on the politics, business and culture of the climate and nature crises - in your inbox every Thursday. Our weekly culture newsletter – from books and art to pop culture and memes – sent every Friday. A weekly round-up of some of the best articles featured in the most recent issue of the New Statesman, sent each Saturday. A newsletter showcasing the finest writing from the ideas section and the NS archive, covering political ideas, philosophy, criticism and intellectual history - sent every Wednesday. Sign up to receive information regarding NS events, subscription offers & product updates.

It seems that for company collusion like this a 60 per cent revenue penalty is needed. This seems high, but in light of other recent corporate scandals the approach might be worth considering.

Content from our partners
Transport is the core of levelling up
The forgotten crisis: How businesses can boost biodiversity
Small businesses can be the backbone of our national recovery