Recent research has documented a substantial role in antitrust enforcement by U.S. states. While many of the cases litigated involve small local firms, a non-trivial portion encompass multiplestate issues. Some previous literature has investigated whether states engage in free-riding behavior in environmental regulation, and whether governments free ride on private decisions in provision of public goods. In this paper, we analyze a sample of antitrust cases involving crossstate impacts (from the Multi-State Antitrust Database, provided by the National Association of Attorneys General) and explain the determinants of free-riding (which we define as participatingin a case, but not as a lead plaintiff). JEL classification:

Robert M. Feinberg

Thomas A. Husted

English

Research Papers in Economics

 
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Do States Free Ride in Antitrust Enforcement? 
 
Robert M. Feinberg and Thomas A. Husted 
American University 
 
October 2011 
 
ABSTRACT 
 
Recent research has documented a substantial role in antitrust enforcement by U.S. states.  While 
many of the cases litigated involve small local firms, a non-trivial portion encompass multiple-
state issues.  Some previous literature has investigated whether states engage in free-riding 
behavior in environmental regulation, and whether governments free ride on private decisions in 
provision of public goods.  In this paper, we analyze a sample of antitrust cases involving cross-
state impacts (from the Multi-State Antitrust Database, provided by the National Association of 
Attorneys General) and explain the determinants of free-riding (which we define as participating 
in a case, but not as a lead plaintiff). 
    
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I.  Introduction 
Recent research has examined the role of state governments in the U.S. 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 riding” behavior.  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.  Since 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 riding 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  
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[Isaac, Walker and Thomas (1984)], experience through repeated game play [Fischbacher and 
Gachter (2010)], pre-game 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.  Chari 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 ride 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 (2009) raises the concern that national 
antitrust enforcement in a global economy (with multi-market contact among exporters) may be  
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sub-optimal due to free-riding on the antitrust activity of other countries.  However, no empirical 
evidence is provided.  No previous work has examined whether state antitrust enforcement can 
be viewed in terms of free-riding.  Recent work [Feinberg and Reynolds (2010)] has documented 
the significant amount of state antitrust activity ongoing and explained this activity in terms of 
economic and political factors, as well as noting its impact on business entry and relocation 
decisions at the state level [Feinberg and Husted (2011)].   
A significant number of antitrust cases concern more than one state and, as a result, the 
outcome of these cases could potentially benefit several states.  Free-riding by states in the 
decision to participate in multistate antitrust litigation is similar to the situations described above.  
States have the option of joining the litigation at any stage of the process, ranging from initiating 
the litigation to joining the litigation at settlement.  Each state’s attorney general has the 
authority to make the decision to enter into these multistate antitrust lawsuits.  Provost (2010) 
argues the state attorney general’s decision will depend on policy motivations, related to the 
interests of the state population, and political considerations, related to the attorney general’s 
political party or electoral ambitions.  The importance and intensity of these motivations and 
political circumstances will vary considerably across the states, so it is highly likely that each 
state will behave differently in the timing of its entry into the litigation process.  A key aspect is 
that states can benefit from such an outcome even if they do not lead the antitrust investigation or 
even if they take an active role from the beginning.  As a result, on the assumption that other 
states will bear the greater cost of initiating the case, there is considerable incentive for state 
governments to act “selfishly” and reduce costs by deferring and joining any antitrust suit later in 
the investigation.   In what follows we explore the role of free-riding by states in this area.   
  
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III. Data and Methodology 
Based on the Antitrust Multistate Litigation Database (for the years 1990-2006)  put 
together by the National Association of Attorneys General, we analyze all state-by-case 
observations where more than one state was involved at any stage of the case (as either “lead 
plaintiff”, “participating state”, or “settling state”) ; we interpret this as the set of cases in which 
there were expected to be benefits beyond a single state – so the possibility of free-riding would 
exist.  There are a total of 1181 observations, involving 47 distinct cases and all 50 states. 
We define two alternative “free-riding” dependent variables, participation as other than the lead 
plaintiff (NotLead), which might be thought of as “weak” free-riding, and participation only at 
the settlement stage of the case (Settlement), which could be viewed as “strong” free-riding.  As 
these dependent variables are binary, we estimate this model using a probit analysis. 
The included explanatory variables define the underlying legal, economic, and political 
circumstances of these cases.  The type of case may be an important indicator both of the 
complexity – hence cost – and likely benefits of involvement in the litigation.  Horizontal 
conspiracy (Horizontal Case) and merger cases (Merger Case) raise relatively straightforward 
economic and legal issues and have potential benefits to the plaintiff which are likely to be 
reasonably well predicted ex ante.  Other cases, which may seem more costly and with more 
uncertain benefits e.g., vertical issues, monopolization, restrictive contracts, etc) might be 
expected to lead to greater free-riding behavior.   
As described above, states can enter into antitrust cases later and still enjoy the benefits 
from any settlement.  It is expected, then, that states with more resources are less likely to free 
ride.  We measure these resources along several dimensions:  the size of the state economy  
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(GSP),  the relative importance of government expenditures in the state (Gov’t Share of GSP), 
and per capita income (Income).  We expect to observe that larger, more affluent, states, with 
relatively larger government sectors (and hence greater resources available) are more likely to 
take the lead on antitrust enforcement –and hence less likely to free-ride on other states’ activity.  
The existence of federal resources as a result of its involvement in these cases (Federal 
Involvement) should reduce the need for immediate state involvement and, therefore, increase 
the amount of state free riding.   
As described earlier,  one of the key determinants of free riding is the number of 
individual parties involved in the transaction.  We include a measure of the number of states 
included in any stage of the multistate litigation (Number of States) to capture this effect.  Two 
variables are included to describe the political circumstances involving the state attorney general 
– whether the AG is from the Republican party (GOP AG) and whether the AG is appointed 
(Appointed AG).  Feinberg and Reynolds (2010) found that Republican AGs and appointed AGs 
were less likely to participate in antitrust cases; we examine whether this reluctance extends to a 
more limited role (more free-riding) where they do participate.  Summary statistics for the 
dependent and independent variables are presented in Table 1.  
IV. Results 
Marginal estimates, evaluated at the mean values of the independent variables, from a 
probit estimation of the probability of participating in a case as other than the lead plaintiff are 
presented in Tables 2 and 3.  Results from the “weak” form of free riding, where the state is 
participating in a nonlead role, are presented in Table 2.  The results from the “strong” form of 
free riding, where the state enters only at the settlement stage, are presented in Table 3.   While  
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there are differences in the marginal effects between the two models, there are some consistent 
findings.  In both models, the number of states participating in the litigation increases the free 
riding behavior and the resources available to the state government, measured by both the state 
GSP and the relative size of the government sector, decreases both weak and strong free riding 
behavior, as expected.  In addition, political effects do not seem to motivate either the weak or 
strong forms of free riding behavior. 
We do find some  interesting  differences in  coefficient estimates between the weak and 
strong free riding models.  States are less likely to free-ride in a strong way (i.e., only 
participating at the settlement stage) on horizontal and merger cases; the implication then is that 
there is more likely to be strong free-riding on more complicated/controversial cases where 
benefits (and perhaps costs) are more difficult to determine (and more uncertain) ex ante; for 
these, as the case proceeds, better information may emerge and states may join in.   We also find 
that the presence of federal involvement in a case has a sizeable positive effect on strong (but not 
weak) free-riding; states seem assured that sufficient resources will be available to pursue a case 
and they can then join in at the end. 
 
V. Conclusion 
  Free-riding by government entities has been little-studied.  No previous empirical 
research has examined whether state governments engage in free-riding in their enforcement of 
state and federal antitrust statutes.  In this paper, we provide evidence that availability of 
governmental resources, potential number of states involved, the type of antitrust case, and the 
help of the federal government all play their expected roles in determining this type of free-
riding.  
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  The social welfare implications of this free-riding behavior are unclear.  Traditional 
analyses of free-riding view it as leading to suboptimal provision of some activity by individuals 
– leading to the role of government to step in and resolve this market failure.  Does free-riding 
by states imply suboptimal antitrust case-filing activity?  One might view the ability of the 
federal government to step in and file cases as a mechanism which deals with any such 
suboptimal state enforcement.  However, analysis of this issue is beyond the scope of this paper. 
 
 
    
9 
 
 
REFERENCES 
 
Becker, Elizabeth and Cotton M. Lindsay, “Does the Government Free Ride?” Journal of Law 
and Economics, Vol. 37, No. 1 (April 1994), pp. 277-296. 
 
Chari, V.V. and Patrick J. Kehoe, “On the need for fiscal constraints in a monetary union,” 
Journal of Monetary Economics, Vol. 54, No. 8 (November 2007), pp. 2399-2408. 
 
Choi, Jay Pil and Heiko Gerlach, “International Antitrust Enforcement and Multi-Market 
Contact,” CESifo Working Paper No. 2599, March 2009 
 
Delmas, Magali and Arturo Keller, “Free Riding in Voluntary Environmental Programs: The 
Case of the U.S. EPA WasteWater Program,” Policy Sciences, Vol. 38 (2005): 91-106. 
 
Feinberg, Robert M. and Kara M. Reynolds, “The Determinants of State-Level Antitrust 
Activity,” Review of Industrial Organization, Vol. 37, No. 3 (November 2010), pp. 179-196. 
 
Feinberg, Robert M. and Thomas A. Husted, “Patterns of Establishment Entry and State-Level 
Antitrust Activity,” Journal of Competition Law and Economics, 2011; doi: 
10.1093/joclec/nhr013. 
 
Isaac, R. Mark, James M. Walker and Susan H. Thomas, “Divergent Evidence on Free Riding: 
An Experimental Examination of Possible Explanations,” Public Choice, Vol. 43, No. 2 (1984), 
pp. 113-149  
 
Fischbacher, Urs and Simon Gachter, “Social Preferences, Beliefs, and the Dynamics of Free 
Riding in Public Goods Experiments,” American Economic Review, Vol. 100, No. 1 (March 
2010), pp. 541-556. 
 
Konisky, David M. and Neal D. Woods, “Exporting Air Pollution? Regulatory Enforcement and 
Environmental Free Riding in the United States,” Political Research Quarterly, Published online 
before print April 10, 2009, doi: 10.1177/1065912909334429 . 
 
Lee, Dwight R., “Free Riding and Paid Riding in the Fight Against Terrorism,” American 
Economic Review Papers and Proceedings, Vol. 78, No. 2 (May 1988), pp. 22-26. 
 
Provost, Colin, “An Integrated Model of U.S. State Attorney General Behavior in Mult-State 
Litigation,” State Politics and Policy Quarterly, Vol. 10, No. 1 (Spring 2010): 1-24. 
 
Sav, G. Thomas, “Private Giving Crowding Government Funding in Public Higher Education,” 
American Journal of Economics and Business Administration, Vol. 2, No. 3 (2010), pp. 293-299.  
10 
 
Table 1.  Descriptive Statistics, N=1181 
 
Variable         Mean      Std Dev    Min    Max 
   Dep Vars         
         
NotLead  0.909  0.287  0  1 
         
Settlement  0.189  0.392  0  1 
         
    Indep Vars         
         
Federal 
Involvement 
0.667  0.471  0  1 
         
Horizontal Case  0.256
  0.436  0  1 
         
Merger Case  0.109
  0.312  0  1 
         
Number of States  41.41  14.71  3  51 
         
Gov’t Share of 
GSP 
0.128
  0.035  0.069  0.281 
         
GSP  208315.2
  243206.1  14010  1512852 
         
Income  50529.4
  7836.05  30478.8  72679 
         
GOP AG  0.332
  0.471  0  1 
         
Appointed AG   0.087
  0.282  0  1 
 
    
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Table 2. Probit Results:  Dependent Variable=”Weak” Free Riding 
(NotLead=Participation in a case other than as the lead plaintiff) 
 
Independent Variable     Marginal Effects   
   
Federal Involvement  -0.002 (0.14) 
   
Horizontal Case   0.002 (0.12)
 
   
Merger Case  -0.013 (0.55)
 
   
Number of States  0.0019 (4.28)
*** 
   
Gov’t Share of GSP  -0.437 (2.12)
** 
   
Ln(GSP)  -0.057 (8.70)
*** 
   
Ln(Income)  -0.006 (0.15)
 
   
GOP AG  0.0093 (0.81)
 
   
Appointed AG   0.012 (0.46)
 
   
Pseudo R
2  0.259 
N=1181 
 z-statistics in parentheses next to estimated coefficients.  
*, **, *** denote statistical significance at 10%, 5%, 1%, respectively. 
 
 
    
12 
 
Table 3. Probit Results:  Dependent Variable=”Strong” Free Riding 
(Settlement=Participation in a case only at settlement) 
 
Independent Variable     Marginal Effects   
   
Federal Involvement  0.174    (8.51)
*** 
   
Horizontal Case  -0.177   (7.91)
** 
   
Merger Case  -0.151   (3.14)
*** 
   
Number of States   0.0039  (2.79)
*** 
   
Gov’t Share of GSP  -0.659    (2.72)
*** 
   
Ln(GSP)  -0.061    (9.18)
*** 
   
Ln(Income)  -0.037    (0.83)
 
   
GOP AG  0.0064    (0.56)
 
   
Appointed AG   0.020      (0.81)
 
   
Pseudo R
2  0.254 
N=1181 
 z-statistics in parentheses next to estimated coefficients.  
*, **, *** denote statistical significance at 10%, 5%, 1%, respectively. 
 
 
 

An Integrated Model of U.S. State Attorney General Behavior

Divergent Evidence on Free Riding: An Experimental Examination of Possible Explanations,”

Does the Government Free Ride?”

Exporting Air Pollution? Regulatory Enforcement and Environmental Free Riding

International Antitrust Enforcement and Multi-Market Contact,”

On the need for fiscal constraints in a monetary union,”

Private Giving Crowding Government Funding in Public Higher Education,”

Riding and Paid Riding in the Fight Against Terrorism,” American Economic Review Papers and Proceedings,

Do States Free Ride in Antitrust Enforcement?

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Do States Free Ride in Antitrust Enforcement?

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