Brandeis' Policeman: Results from a Laboratory Experiment on How to Prevent Corporate Fraud
Michael D. Guttentag
Loyola Marymount University
University of Southern California - Marshall School of Business; Georgetown University - Department of Management
Samuel N. Fraidin
Gregory P. Joseph Law Offices LLC
June 1, 2008
Journal of Empirical Legal Studies, Vol. 5, No. 2, July 2008
Loyola-LA Legal Studies Paper No. 2009-24
We use a laboratory experiment to study how to prevent corporate fraud. Our experiment is the first to replicate the salient features of corporate fraud in a controlled setting. We find that requiring additional disclosures significantly reduces fraud. This finding runs counter to implications from previous research, but that research does not include many of the defining aspects of corporate fraud. Our results support the federal government's continued reliance on disclosure as a way to reduce fraud, a reliance that dates back to Louis Brandeis' observation that publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.
Number of Pages in PDF File: 37
Keywords: Fraud, Disclosure, Experimental Economics, Cooperative Games, Group Behavior
JEL Classification: C71, C92, D21, D23, D71, K14, K22
Date posted: October 10, 2008 ; Last revised: March 27, 2012
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