DP12260 Whistleblower Rewards, False Reports, and Corporate Fraud

Author(s): Paolo Buccirossi, Giovanni Immordino, Giancarlo Spagnolo
Publication Date: August 2017
Keyword(s): Corporate Fraud, False allegations, Judicial errors, Standard of proof, Whistleblowers rewards
JEL(s): G38, H83, K20, K42, L41, M41
Programme Areas: Public Economics, Financial Economics, Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12260

It is often claimed that rewards for whistleblowers lead to fraudulent reports, but for several US programs this has not been a major problem. We model the interaction between rewards for whistleblowers, sanctions against fraudulent reporting, judicial errors and standards of proof in the court case on a whistleblower's allegations and the possible follow-up for fraudulent allegations. Balancing whistleblower rewards, sanctions against fraudulent reports, and courts' standards of proof is essential for these policies to succeed. When the risk of retaliation is severe, larger rewards are needed and so are tougher sanctions against fraudulent reports. The precision of the legal system must be sufficiently high, hence these programs are not viable in weak institution environments, where protection is imperfect and court precision low, or where sanctions against false reporting are mild. Internal reporting channels may interfere with external ones in unexpected ways.