Rewarding Whistle-Blowers: Implications on Deterrence and on Principal-Agent Contracts

Barcelona

Jornada; ENTER Jamboree; 2012

I develop a model that demonstrates how whistle-blower programs that offer a reward to employees for the public exposure of corporate crimes can improve deterrence, but at the expense of compromising productive efficiency. In the model, rewards create a decision problem to employees on how to allocate effort among productive activities and activities related to gathering crime evidence, so that deterrence and productive efficiency are conflictive objectives. In this context, while rewards can improve deterrence, they can also distort the optimal contract between the principal
and the agent. I also demonstrate that firm owners may have incentives to introduce private reward programs, which can have a higher deterrence effect than public whistle-blower programs.