Corporate criminal liability and optimal firm behavior: internal monitoring versus managerial incentives

Paolo Polidori and Désirée Teobaldelli

European Journal of Law and Economics, 2018, vol. 45, issue 2, No 3, 284 pages

Abstract: Abstract Legislation addressing corporate criminal liability has been the subject of worldwide debate ever since the financial scandals of the early 2000s. Under current regimes, firms must observe such compliance requirements as internal monitoring mechanisms, the purpose of which is inducing firms to detect the wrongful conduct of their agents. We develop an analytical framework for identifying when, and to what extent, firms may find it beneficial to adopt these regulatory devices. We conclude that more productive firms, those operating in sectors with more market power, and firms whose managers have more opportunities for criminal activity are more likely to prevent wrongful conduct—either through monitoring or the payment of efficiency wages. When the potential returns to illegal activities are high or the firm is large, internal monitoring is probably the optimal strategy of crime prevention; in contrast, smaller firms typically proceed by paying efficiency wages (or ignoring crime). This paper also analyzes the role of the State’s legal capacity as well as the effects of interactions between the structure of reputational losses and the firm’s market power.

Keywords: Corporate governance; Law enforcement; Compliance; Deterrence; Regulation (search for similar items in EconPapers)
JEL-codes: G34 G38 K22 K42 L50 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s10657-016-9527-2

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