Optimal Non-Prosecution Agreements and the Reputational Effects of Convictions

19 Pages Posted: 26 Sep 2017 Last revised: 30 Sep 2017

See all articles by Murat C. Mungan

Murat C. Mungan

George Mason University - Antonin Scalia Law School, Faculty

Date Written: September 23, 2017

Abstract

Many claim that non-prosecution agreements (NPAs) reduce deterrence by mitigating the reputational sanctions that would otherwise be imposed on corporations through plea-bargains. They suggest, based on this claim, that NPAs ought to be used infrequently. This article presents a signaling model wherein reputational sanctions emerge as a result of noisy signals produced through a firm's prosecution. It is shown that, if, as claimed, NPAs provide third parties with less information regarding a firm's wrongdoings, then firms would be willing to pay an NPA premium to avoid convictions. Thus, the NPA premium can be chosen to induce only those firms which would otherwise be over-deterred to accept NPAs. Therefore, offering NPAs with high premia is superior to the option of not using NPAs. The article also characterizes optimal NPAs, and identifies relationships between deterrence; frequency of NPA use; firms' characteristics; and NPA terms. It explains how these relationships can be exploited to form and test hypotheses on whether convictions obtained through plea-bargains cause greater reputational harm to firms than NPAs.

Keywords: Reputational Sanctions, Non-Prosecution Agreements, Deferred Prosecution Agreements, Deterrence, Over-Deterrence

Suggested Citation

Mungan, Murat C., Optimal Non-Prosecution Agreements and the Reputational Effects of Convictions (September 23, 2017). George Mason Law & Economics Research Paper No. 17-40. Available at SSRN: https://ssrn.com/abstract=3041967 or http://dx.doi.org/10.2139/ssrn.3041967

Murat C. Mungan (Contact Author)

George Mason University - Antonin Scalia Law School, Faculty ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States

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