Targeting Employees for Corporate Crime and Forbidding Their Indemnification
45 Pages Posted: 24 Jun 2004
Date Written: April 2005
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: Suggested Citation