Do States Free Ride in Antitrust Enforcement?

By Feinberg, Robert M.; Husted, Thomas A. | Economic Inquiry, January 2013 | Go to article overview

Do States Free Ride in Antitrust Enforcement?


Feinberg, Robert M., Husted, Thomas A., Economic Inquiry


I. INTRODUCTION

Recent research has examined the role of state governments in the United States in antitrust enforcement over the past 20 years. What has not been explored is the extent to which states make strategic decisions on their involvement in antitrust litigation. In particular, while most state antitrust cases involve purely local matters, a significant number of these concern more than one state; states then need to decide whether to invest in leading an investigation or letting other states take the lead and participating in some lesser role, which includes simply signing on to a settlement. We view the decision by a state to delay entry into antitrust litigation to be a type of "free-tiding" behavior. (1) In this paper we analyze this issue of "free riding" by states in antitrust activity.

II. PREVIOUS LITERATURE

One of the defining characteristics of a pure public good is the nonexcludability of the benefits from its consumption. As benefits can be received by individuals without having to pay for the goods, this nonexcludability creates the possibility for a "free-rider problem." As a consequence of this free-tiding behavior, the private market cannot exact a price for this good and this may mean the private market will provide a suboptimal amount of the good. Free riders are usually used as justification for government intervention into the private market to allocate these so-called public goods in order to correct the market failure. While this behavior would seem rational, it is not easily observed so the extent of free riding is not generally known. Researchers have employed experimental game evidence to measure the extent of free riding, with results ranging from none to an extreme amount. Factors found in this literature that appear to decrease the degree of free-riding behavior under certain conditions include smaller group size (Isaac, Walker, and Thomas 1984), experience through repeated game play (Fischbacher and Gachter 2010), pregame communication among participants, and an ability to exclude players from the group or other sanctions (Delmas and Keller 2005).

While the free-rider problem and the experimental evidence have focused on private market decision makers, it is straightforward to extend these behaviors to self-interested governments. One possibility is that governments reduce the amount of certain appropriations as a result of private contributions. Becker and Linsday (1994) find a considerable degree of government free-riding behavior in the context of appropriations to public higher education institutions. An alternative source of free riding does not involve the private sector, but is between government activities, particularly those with significant spillover effects. Lee (1988) considers the issue of free riding among countries in their efforts devoted to fighting terrorism. More recently, Sav (2010) finds a similar impact. Chati and Kehoe (2007) provide a theoretical discussion of what they call a free-rider problem among members of a monetary union in their fiscal and regulatory policies, caused by an inability of the monetary authority to commit to their policies.

Sigman (2002) finds that water pollution control is affected by the degree of spillovers crossing international borders. Somewhat closer to the focus of this paper, Konisky and Woods (2010) investigate whether U.S. states free tide in environmental regulatory actions. Their results are somewhat mixed; while they report some impact in reducing state enforcement of the Clean Air Act in their counties adjacent to international borders, they do not find this pattern in counties bordering other U.S. states.

A recent theoretical paper by Choi and Gerlach (2012) raises the concern that national antitrust enforcement in a global economy (with multi-market contact among exporters) may be suboptimal due to free riding on the antitrust activity of other countries. However, no empirical evidence is provided.

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