Embezzlement, Whistleblowing, and Organizational Architecture: An Experimental Investigation

48 Pages Posted: 13 Feb 2015 Last revised: 10 Dec 2015

Michael D. Makowsky

Clemson University - John E. Walker Department of Economics

Siyu Wang

George Mason University

Date Written: August 10, 2015

Abstract

This paper investigates the optimal shape of organizations to reduce embezzlement. We stylize embezzlement and whistleblowing behavior as a synthesis of a public goods and an ultimatum game. In the game, agents move sequentially along an organizational architecture, can take a share of the available resources, and can choose to "blow the whistle", an action that sets all payoffs to zero. The resources not taken will grow and benefit all agents. Six basic organizational architectures are tested, pure horizontal, two-level pyramid and inverse pyramid, three-level pyramid and inverse pyramid and pure vertical. Our results suggest that flat and pyramid structures are more effective at reducing embezzlement. Rates of embezzlement and whistleblowing increase with the number of levels in the structure. Holding the number of levels constant, embezzlement rates are lower in pyramid shaped structures than inverted-pyramid shaped structures, while whistleblowing rates are unchanged. Our results are relevant to public agencies, foreign aid, charitable non-profits, and other contexts where capital leakage is a common problem and the costs of whistleblowing are borne broadly by the members of the organization and beneficiaries of the public good.

Keywords: embezzlement, corruption, laboratory experiment, hierarchy, leadership

JEL Classification: C92, L22, K42

Suggested Citation

Makowsky, Michael D. and Wang, Siyu, Embezzlement, Whistleblowing, and Organizational Architecture: An Experimental Investigation (August 10, 2015). GMU Working Paper in Economics No. 15-59. Available at SSRN: https://ssrn.com/abstract=2563849 or http://dx.doi.org/10.2139/ssrn.2563849

Michael D. Makowsky (Contact Author)

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

HOME PAGE: http://michaelmakowsky.com

Siyu Wang

George Mason University ( email )

4400 University Drive
MSN 1B2
Fairfax, VA 22030
United States

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