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Compliance Programs, Signaling and Firms' Internal Coordination

Author

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  • Daniel Herold

    () (Justus-Liebig-University Giessen)

Abstract

Fines imposed on firms for corporate infringements such as cartels reduce these infringement's profitability. When a manager knows when a violation is unprofitable he can prevent violations committed by an uninformed employee by investing in compliance programs (CPs). Investments can be interpreted as signals. The paper shows that there exists a separating equilibrium where high investments in CPs induce the employee to obey the law. However, if CPs are too expensive the signal is not credible. The manager can also show personal commitment to compliance ('tone-at-the-top'). Coordination on an efficient outcome will then be achievable if commitment is costly. Imposing high, individual sanctions on the manager disturbs a firm's internal coordination because he is unable to credibly signal that an infringement does not pay off for the firm. However, imposing sanctions on the employee unambiguously deters violation.

Suggested Citation

  • Daniel Herold, 2017. "Compliance Programs, Signaling and Firms' Internal Coordination," MAGKS Papers on Economics 201749, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  • Handle: RePEc:mar:magkse:201749
    as

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    File URL: http://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2017/49-2017_herold.pdf
    File Function: First 201749
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    References listed on IDEAS

    as
    1. Giovanna d’Adda & Donja Darai & Nicola Pavanini & Roberto A. Weber, 2017. "Do Leaders Affect Ethical Conduct?," Journal of the European Economic Association, European Economic Association, vol. 15(6), pages 1177-1213.
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    5. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-940, December.
    6. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
    7. Karpoff, Jonathan M & Lott, John R, Jr, 1993. "The Reputational Penalty Firms Bear from Committing Criminal Fraud," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 757-802, October.
    8. Giovanna d’Adda & Donja Darai & Nicola Pavanini & Roberto A. Weber, 2017. "Do Leaders Affect Ethical Conduct?," Journal of the European Economic Association, European Economic Association, vol. 15(6), pages 1177-1213.
    9. Connor, John M. & Bolotova, Yuliya, 2006. "Cartel overcharges: Survey and meta-analysis," International Journal of Industrial Organization, Elsevier, vol. 24(6), pages 1109-1137, November.
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Bitcoin; Compliance; Crime; Tone-at-the-top;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law

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