Optimal Deterrence of Illegal Behavior Under Imperfect Corporate Governance
CentER Discussion Paper No/ 2014-078
34 Pages Posted: 21 Dec 2014
Date Written: December 18, 2014
We study the optimal design of liability schemes (at the corporate or individual level) when the objective is to deter socially harmful corporate behavior without discouraging productivity enhancements. We assume that firms face agency problems between shareholders and managers (moral hazard) and that unlimited sanctions on individuals are not available. We show that pure corporate liability rules can induce the first-best outcome only if firms can condition compensation on detection and the enforcement system is good enough. In other circumstances, unless individual sanctions can be very high, optimal mechanisms typically impose both corporate and individual liability.
Keywords: illegal behavior, deterrence, agency problems, moral hazard, corporate liability, corporate crime
JEL Classification: D82, K21, L49
Suggested Citation: Suggested Citation