A Theory of Whistleblower Rewards

Abstract

To enforce the law, the government must learn about violations of the law. One way of obtaining such information is by employing police officers and investigators. An alternative way is by rewarding whistleblowers. In this paper I consider two basic questions relating to whistleblower rewards. First, what is the optimal size of whistleblower rewards? Second, how should we choose between employing police officers and rewarding whistleblowers? I develop a model which highlights two features of the whistleblowing context: whistleblowers bear a personal cost, and a reward may encourage false reports. I find that there is a non-monotonic relationship between the personal cost to whistleblowers and the optimal reward, and between the risk of a false report and the optimal reward. Furthermore, offering a whistleblower reward dominates the employment of police officers and investigators when the risk of a false report is small.

JEL Classification: K42, K14