Reporting Misconduct: The Role of Penalty Severity and Perceived Fairness

Quy Lam and Ketki Sheth ()
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Quy Lam: University of California, Merced
Ketki Sheth: Department of Economics, University of Tennessee

No 2026-02, Working Papers from University of Tennessee, Department of Economics

Abstract: Deterrence theory assumes that harsher penalties reduce misconduct by raising its cost. Yet enforcement often depends on individuals who witness or respond to wrongdoing, and their behavior may also be shaped by the severity of punishment. Using a high-powered online experiment framed in a workplace setting, we test whether increasing penalties reduces willingness to report. We find that harsher penalties suppress reporting: employees are 1 percentage point less likely to report for every 10 percentage point increase in the penalty. This effect is mediated by perceived fairness: reporting declines only when penalties are seen as excessive. Despite the decrease in reporting, higher penalties still deter misconduct overall, as their direct deterrent effect outweighs the indirect increase in law-breaking caused by lower reporting rates. We also find that individuals support harsher penalties before a violation occurs, when deterrence is relevant, but prefer more lenient consequences after the offense has happened. This helps explain how policies can arise and persist in equilibrium, even when people are unwilling to enforce them in practice. These findings advance understanding of how social norms and perceptions of fairness shape the decisions of those who observe misconduct, and highlight the need to design sanctions that align with public willingness to act on violations. More severe penalties can discourage reporting, weaken enforcement, and ultimately undermine the effectiveness of deterrence mechanisms.

Keywords: Reporting; Whistle-blowing; Deterrence; Penalty Severity; Perceived Fairness; Misconduct; Enforcement; Online Experiment (search for similar items in EconPapers)
JEL-codes: C91 D63 D91 K42 M54 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2026-08
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