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Corporate criminal liability and optimal firm behavior: internal monitoring versus managerial incentives

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  • Paolo Polidori

    (University of Urbino)

  • Désirée Teobaldelli

    (University of Urbino)

Abstract

Legislation addressing corporate criminal liability has been the subject of worldwide debate ever since the financial scandals of the early 2000s. Under current regimes, firms must observe such compliance requirements as internal monitoring mechanisms, the purpose of which is inducing firms to detect the wrongful conduct of their agents. We develop an analytical framework for identifying when, and to what extent, firms may find it beneficial to adopt these regulatory devices. We conclude that more productive firms, those operating in sectors with more market power, and firms whose managers have more opportunities for criminal activity are more likely to prevent wrongful conduct—either through monitoring or the payment of efficiency wages. When the potential returns to illegal activities are high or the firm is large, internal monitoring is probably the optimal strategy of crime prevention; in contrast, smaller firms typically proceed by paying efficiency wages (or ignoring crime). This paper also analyzes the role of the State’s legal capacity as well as the effects of interactions between the structure of reputational losses and the firm’s market power.

Suggested Citation

  • Paolo Polidori & Désirée Teobaldelli, 2018. "Corporate criminal liability and optimal firm behavior: internal monitoring versus managerial incentives," European Journal of Law and Economics, Springer, vol. 45(2), pages 251-284, April.
    • Handle: RePEc:kap:ejlwec:v:45:y:2018:i:2:d:10.1007_s10657-016-9527-2
    DOI: 10.1007/s10657-016-9527-2
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    More about this item

    Keywords

    Corporate governance; Law enforcement; Compliance; Deterrence; Regulation;
    All these keywords.

    JEL classification:

    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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