Brandeis' Policeman: Results from a Laboratory Experiment on How to Prevent Corporate Fraud

37 Pages Posted: 10 Oct 2008 Last revised: 27 Mar 2012

Michael D. Guttentag

Loyola Marymount University

Christine Porath

University of Southern California - Marshall School of Business; Georgetown University - Department of Management

Samuel N. Fraidin

Gregory P. Joseph Law Offices LLC

Date Written: June 1, 2008

Abstract

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

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

Michael D. Guttentag (Contact Author)

Loyola Marymount University ( email )

7900 Loyola Boulevard
Los Angeles, CA 90045
United States

Christine Porath

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Georgetown University - Department of Management

3700 O Street, NW
Washington, NY 20057
United States

Samuel N. Fraidin

Gregory P. Joseph Law Offices LLC

805 Third Avenue, 31st Floor
New York, NY 10022
United States

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