Deterrence and the Corporate Death Penalty
Hebrew University - Faculty of Law
Interdisciplinary Center (IDC) Herzliyah - Radzyner School of Law
October 20, 2007
Criminal convictions of business entities can trigger their demise, as graphically illustrated by the unraveling of accounting firm Arthur Andersen. The threat of going out of business is commonly perceived as providing firms with powerful - perhaps even excessive - incentives to contain misconduct. This Essay, however, demonstrates that the corporate death penalty may undermine deterrence. Specifically, we show that in many cases harsh corporate penalties may lead to less monitoring for misconduct and undermine compliance incentives within professional firms. We also explore the conditions under which more lenient liability regimes - such as holding firms liable only for sufficiently pervasive misconduct - might enhance deterrence. Our analysis has implications not only for entity criminal liability but also for collective sanctions more generally. For example, the insight that draconian penalties might undermine deterrence in group settings sheds a new light on the wisdom of allowing law and accounting firms to organize as limited-liability entities.
Number of Pages in PDF File: 40
Keywords: Criminal Liability, Corporate Sanction, Marginal Deterrence, Collective Actionworking papers series
Date posted: October 27, 2007 ; Last revised: January 31, 2009
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