Whistle-Blowing and Incentives in Firms

Guido Friebel and Sergei Guriev
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Guido Friebel: Goethe-Universität Frankfurt am Main

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Abstract: Whistle-blowing is an important mechanism of corporate governance. We show that whistle-blowing has negative effects on productive efficiency by undermining the incentives within a corporate hierarchy. In our model, a top manager intends to overreport earnings; a division manager may have evidence about the intended overreporting. We show that the division manager is more likely to have such evidence when the performance of his own division is low. Top management may offer a bribe to prevent the manager from blowing the whistle. This provides the division manager with an additional payoff when his division's output is low. Therefore, potential whistle-blowing undermines the division manager's incentives to exert effort, which results in a less efficient outcome.

Keywords: economics; management; strategy; international; business; industrial; organization; finance; managerial (search for similar items in EconPapers)
Date: 2012-10
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Citations: View citations in EconPapers (12)

Published in Journal of Economics and Management Strategy, 2012, 21 (4), pp.1007 - 1027. ⟨10.1111/j.1530-9134.2012.00354.x⟩

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Journal Article: Whistle‐Blowing and Incentives in Firms (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03399554

DOI: 10.1111/j.1530-9134.2012.00354.x

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