37 Pages Posted: 10 Oct 2008 Last revised: 27 Mar 2012
Date Written: June 1, 2008
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.
Keywords: Fraud, Disclosure, Experimental Economics, Cooperative Games, Group Behavior
JEL Classification: C71, C92, D21, D23, D71, K14, K22
Suggested Citation: Suggested Citation
Guttentag, Michael D. and Porath, Christine and Fraidin, Samuel N., Brandeis' Policeman: Results from a Laboratory Experiment on How to Prevent Corporate Fraud (June 1, 2008). Journal of Empirical Legal Studies, Vol. 5, No. 2, July 2008; Loyola-LA Legal Studies Paper No. 2009-24. Available at SSRN: https://ssrn.com/abstract=1281089
By Ivy Zhang