Targeting Employees for Corporate Crime and Forbidding Their Indemnification

45 Pages Posted: 24 Jun 2004

See all articles by Wallace P. Mullin

Wallace P. Mullin

George Washington University - Department of Economics

Christopher M. Snyder

Dartmouth College - Department of Economics

Date Written: April 2005

Abstract

The literature on corporate crime has focused on crimes committed by employees who are not necessarily acting in the interest of the firm. In this setting it is clear employees should be sanctioned; the question is whether the firm should be as well. The recent wave of corporate scandals has a different character: in many of these cases, the crime serves firm owners' direct interest; employees commit crimes only in response to incentives provided by the firm. In this latter setting it is clear the firm should be sanctioned; the question is whether employees should be as well. We show sanctioning employees solves a number of enforcement problems---increasing deterrence in the presence of a judgment-proof firm; reducing the chance that type-I enforcement errors lead to the bankruptcy of innocent firms by provide the same level of deterrence with lower overall fines. We show that forbidding indemnification is usually inefficient. The one case we find it to be useful is to encourage the employee's cooperation with prosecutors to increase the probability of successful prosecution of the firm.

Keywords: Corporate crime, indemnification, principal-agent model

JEL Classification: K22, D82, L20

Suggested Citation

Mullin, Wallace P. and Snyder, Christopher M., Targeting Employees for Corporate Crime and Forbidding Their Indemnification (April 2005). Available at SSRN: https://ssrn.com/abstract=558341 or http://dx.doi.org/10.2139/ssrn.558341

Wallace P. Mullin

George Washington University - Department of Economics ( email )

2201 G Street NW
Washington, DC 20052
United States

Christopher M. Snyder (Contact Author)

Dartmouth College - Department of Economics ( email )

301 Rockefeller Hall
Hanover, NH 03755
United States
(603) 646-0642 (Phone)
(603) 646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~csnyder/

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