DP11898 Whistle-Blower Protection: Theory and Experimental Evidence

Author(s): Lydia Mechtenberg, Gerd Muehlheusser, Andreas Roider
Publication Date: March 2017
Keyword(s): Business Ethics, Cheap-Talk Games, Corporate Fraud, Corruption, Lab Experiment, Whistle-Blowing
JEL(s): C91, D73, D83, K42, M59
Programme Areas: Labour Economics, Public Economics, Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11898

Whistle-blowing by employees plays a major role in uncovering corporate fraud. Various recent laws aim at improving protection of whistle-blowers and enhancing their willingness to report. Evidence on the effectiveness of such legislation is, however, scarce. Moreover, critics have raised worries about fraudulent claims by low-productivity employees. We study these issues in a theory-guided lab experiment. Easily attainable ("belief-based") protection indeed leads to more reports, both truthful and fraudulent. Fraudulent claims dilute prosecutors' incentives to investigate, and thereby hamper deterrence. These effects are ameliorated under more stringent ("fact-based") protection.