Risk Attitudes and the Shift of Liability from the Principal to the Agent
This paper studies the problem of illegal behavior within a principal-agent framework. The agent performs an illegal activity which benefits the principal, and can exert an effort that negatively affects the likelihood of detection of the violation.Two opposite legal regimes are considered: in the first, only the risk neutral principal is strictly liable; in the second, only the risk averse agent is The monetary sanction and the probability of detection function are the same in both cases. Our models shows that shifting the liability upon the risk averse agent reduces the principal net benefit, thus favoring deterrence of wrongdoing; however, it can also either increase or reduce the agent effort in cheating. For a specific model we are able to characterize cases in which a reduction in cheating prevails, and shifting the liability upon the agent has clear-cut beneficial effects on compliance.
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- Cyrus Chu, C. Y. & Qian, Yingyi, 1995. "Vicarious liability under a negligence rule," International Review of Law and Economics, Elsevier, vol. 15(3), pages 305-322, September.
- Reinganum, Jennifer F. & Wilde, Louis L., 1990.
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744, California Institute of Technology, Division of the Humanities and Social Sciences.
- Reinganum, Jennifer F & Wilde, Louis L, 1991. "Equilibrium Enforcement and Compliance in the Presence of Tax Practitioners," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(1), pages 163-81, Spring.
- Arlen, Jennifer, 1994. "The Potentially Perverse Effects of Corporate Criminal Liability," The Journal of Legal Studies, University of Chicago Press, vol. 23(2), pages 832-67, June.
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