Optimal Deterrence of Illegal Behavior Under Imperfect Corporate Governance

Research output: Working paperDiscussion paperOther research output

600 Downloads (Pure)

Abstract

We study the optimal design of liability schemes (at the corporate or individual level) when the objective is to deter socially harmful corporate behavior without discouraging productivity enhancements. We assume that firms face agency problems between shareholders and managers (moral hazard) and that unlimited sanctions on individuals are not available. We show that pure corporate liability rules can induce the first-best outcome only if firms can condition compensation on detection and the enforcement system is good enough. In other circumstances, unless individual sanctions can be very high, optimal mechanisms typically impose both corporate and individual liability.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER
Number of pages34
Volume2014-078
Publication statusPublished - 18 Dec 2014

Publication series

NameCentER Discussion Paper
Volume2014-078

Fingerprint

Corporate governance
Deterrence
Liability
Sanctions
Liability rules
Productivity
Managers
Agency problems
Enhancement
Moral hazard
Shareholders
Enforcement

Keywords

  • illegal behavior
  • deterrence
  • agency problems
  • moral hazard
  • corporate liability
  • corporate crime

Cite this

@techreport{e037f38f8c76402abbaa6bdfd8609532,
title = "Optimal Deterrence of Illegal Behavior Under Imperfect Corporate Governance",
abstract = "We study the optimal design of liability schemes (at the corporate or individual level) when the objective is to deter socially harmful corporate behavior without discouraging productivity enhancements. We assume that firms face agency problems between shareholders and managers (moral hazard) and that unlimited sanctions on individuals are not available. We show that pure corporate liability rules can induce the first-best outcome only if firms can condition compensation on detection and the enforcement system is good enough. In other circumstances, unless individual sanctions can be very high, optimal mechanisms typically impose both corporate and individual liability.",
keywords = "illegal behavior, deterrence, agency problems, moral hazard, corporate liability, corporate crime",
author = "C. Argenton and {van Damme}, E.E.C.",
year = "2014",
month = "12",
day = "18",
language = "English",
volume = "2014-078",
series = "CentER Discussion Paper",
publisher = "CentER",
type = "WorkingPaper",
institution = "CentER",

}

Optimal Deterrence of Illegal Behavior Under Imperfect Corporate Governance. / Argenton, C.; van Damme, E.E.C.

Tilburg : CentER, 2014. (CentER Discussion Paper; Vol. 2014-078).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Optimal Deterrence of Illegal Behavior Under Imperfect Corporate Governance

AU - Argenton, C.

AU - van Damme, E.E.C.

PY - 2014/12/18

Y1 - 2014/12/18

N2 - We study the optimal design of liability schemes (at the corporate or individual level) when the objective is to deter socially harmful corporate behavior without discouraging productivity enhancements. We assume that firms face agency problems between shareholders and managers (moral hazard) and that unlimited sanctions on individuals are not available. We show that pure corporate liability rules can induce the first-best outcome only if firms can condition compensation on detection and the enforcement system is good enough. In other circumstances, unless individual sanctions can be very high, optimal mechanisms typically impose both corporate and individual liability.

AB - We study the optimal design of liability schemes (at the corporate or individual level) when the objective is to deter socially harmful corporate behavior without discouraging productivity enhancements. We assume that firms face agency problems between shareholders and managers (moral hazard) and that unlimited sanctions on individuals are not available. We show that pure corporate liability rules can induce the first-best outcome only if firms can condition compensation on detection and the enforcement system is good enough. In other circumstances, unless individual sanctions can be very high, optimal mechanisms typically impose both corporate and individual liability.

KW - illegal behavior

KW - deterrence

KW - agency problems

KW - moral hazard

KW - corporate liability

KW - corporate crime

M3 - Discussion paper

VL - 2014-078

T3 - CentER Discussion Paper

BT - Optimal Deterrence of Illegal Behavior Under Imperfect Corporate Governance

PB - CentER

CY - Tilburg

ER -