Effects of External Whistleblower Rewards on Internal Reporting

Harvard John M. Olin Fellow’s Discussion Paper Series No. 76

39 Pages Posted: 12 Jun 2018 Last revised: 8 Jul 2018

Date Written: May 26, 2018

Abstract

Many have argued that rewards for external whistleblowing on corporate crimes to regulatory agencies could discourage internal reporting in companies, but this issue has not yet been fully analyzed. Based on the observations of past trends in whistleblower cases, this paper develops a model based on the hypotheses that internal reporting helps a company’s internal governance system prevent crime through the exercise of internal control and that external whistleblowing helps a regulatory agency deter crime through the threat of sanctions. The model shows the amount of external whistleblower rewards has a non-monotonic relationship with the probability of internal reporting occurring: As the amount of rewards increases, the probability of internal reporting first increases and, after reaching a maximum, decreases to zero. The socially optimal amount of external whistleblower rewards is determined by considering a trade-off between internal reporting as a means of prevention and external whistleblowing as that of deterrence.

Keywords: Whistleblowing, whistleblower rewards, internal reporting, corporate crimes

JEL Classification: G38, K42, M48

Suggested Citation

Iwasaki, Masaki, Effects of External Whistleblower Rewards on Internal Reporting (May 26, 2018). Harvard John M. Olin Fellow’s Discussion Paper Series No. 76. Available at SSRN: https://ssrn.com/abstract=3188465 or http://dx.doi.org/10.2139/ssrn.3188465

Masaki Iwasaki (Contact Author)

Harvard Law School ( email )

1563 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://hls.harvard.edu/dept/graduate-program/masaki-iwasaki/

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