Private and Public Control of Management
This paper investigates the design of a leniency policy to fight corporate crime. We explicitly take into account the agency problem within the firm. We model this through a three-tier hierarchy: authority, shareholder, and manager. The manager may breach the law and report evidence to the authority. The shareholder writes the managerâ€™s incentive scheme, monitors him, and possibly reports evidence to the authority. Finally, the authority designs a sanctioning/leniency policy that deters corporate crime at the lowest possible cost. The authority designs its policy trying to both (i) exacerbate agency problems within non-compliant firms and (ii) alleviate agency problems within compliant firms. We find that depending on the authorityâ€™s ability to punish the manager, the authority may wish to instigate a â€œwithin-firm race to the courthouseâ€. We also provide comparative statics, carry a welfare analysis and discuss policy implications.
|Date of creation:||Oct 2012|
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