49 Pages Posted: 13 Feb 2015 Last revised: 20 Oct 2017
Date Written: September 1, 2017
We investigate the optimal shape of organizations to reduce embezzlement. In a stylized synthesis of a common pool resource and ultimatum 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, including horizontal, vertical, and pyramid-shaped structures. Our results suggest that horizontal 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.
Keywords: embezzlement, corruption, laboratory experiment, hierarchy, leadership
JEL Classification: C92, L22, K42
Suggested Citation: Suggested Citation
Makowsky, Michael D. and Wang, Siyu, Embezzlement, Whistleblowing, and Organizational Architecture: An Experimental Investigation (September 1, 2017). 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