Leniency policies and illegal transactions

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. (c) 2005 Published by Elsevier B.V.