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Embezzlement, whistleblowing, and organizational architecture: An experimental investigation

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  • Makowsky, Michael D.
  • Wang, Siyu

Abstract

We investigate the optimal shape of organizations to reduce embezzlement. In a stylized synthesis of a common pool resource and ultimatum game, agents are activated sequentially within an organizational architecture wherein they can take a share of the available resources or choose to “blow the whistle”, an action that sets all payoffs to zero. The resources not taken will grow and benefit all agents. Six basic organizational architectures are tested, including horizontal, vertical, pyramid shaped, and inverted pyramid-shaped structures. Our results suggest that horizontal and pyramid structures are more effective at reducing embezzlement. Rates of embezzlement and whistleblowing increase with the number of levels in the structure. Holding the number of levels constant, embezzlement rates are lower in pyramid shaped structures than inverted-pyramid shaped structures, while whistleblowing rates are unchanged. Our results are relevant to public agencies, foreign aid, charitable non-profits, and other contexts where capital leakage is a common problem and the costs of whistleblowing are borne broadly by the members of the organization.

Suggested Citation

  • Makowsky, Michael D. & Wang, Siyu, 2018. "Embezzlement, whistleblowing, and organizational architecture: An experimental investigation," Journal of Economic Behavior & Organization, Elsevier, vol. 147(C), pages 58-75.
  • Handle: RePEc:eee:jeborg:v:147:y:2018:i:c:p:58-75
    DOI: 10.1016/j.jebo.2017.12.024
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    Keywords

    Embezzlement; Whistleblowing; Leadership; Organizational shape; Common pool resource;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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