Whistle‐Blowing and Incentives in Firms

21 Pages Posted: 17 Oct 2012

See all articles by Guido Friebel

Guido Friebel

Goethe University Frankfurt; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Sergei Guriev

Sciences Po; Centre for Economic Policy Research (CEPR)

Date Written: Winter 2012

Abstract

Whistle‐blowing is an important mechanism of corporate governance. We show that whistle‐blowing has negative effects on productive efficiency by undermining the incentives within a corporate hierarchy. In our model, a top manager intends to overreport earnings; a division manager may have evidence about the intended overreporting. We show that the division manager is more likely to have such evidence when the performance of his own division is low. Top management may offer a bribe to prevent the manager from blowing the whistle. This provides the division manager with an additional payoff when his division’s output is low. Therefore, potential whistle‐blowing undermines the division manager’s incentives to exert effort, which results in a less efficient outcome.

Suggested Citation

Friebel, Guido and Guriev, Sergei, Whistle‐Blowing and Incentives in Firms (Winter 2012). Journal of Economics & Management Strategy, Vol. 21, Issue 4, pp. 1007-1027, 2012, Available at SSRN: https://ssrn.com/abstract=2162335 or http://dx.doi.org/10.1111/j.1530-9134.2012.00354.x

Guido Friebel (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Sergei Guriev

Sciences Po ( email )

27 rue Saint-Guillaume
Paris Cedex 07, 75337
France

HOME PAGE: http://econ.sciences-po.fr/staff/sergei-guriev

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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