The Optimal Prosecution of Corporate Fraud: An Error Cost Analysis

Abstract

Federal and state governments, sometimes armed with new legislation, have been increasingly aggressive in pursuing criminal charges against corporations and their executives. While corporate fraud can impose significant costs of the economy when left unchecked, the evidence shows that market mechanisms discipline much bad behavior while the criminalization of corporate behavior, coupled with bringing highly complex cases before juries that can neither understand the issues nor their instructions, imposes significant costs on the economy by deterring socially efficient risk-taking behavior by corporations and their executives. Criminal prosecution companies and their executives for corporate wrongdoings should be limited to clear cases of fraud and jury trials should be limited to the extent this is constitutionally permissible.

Keywords: Corporate Fraud, White Collar Crimes, Error Costs, Complexity