Private and Public Control of Management

Abstract

This paper investigates the design of a leniency policy to fight corporate crime. The manager may breach the law and report evidence to the authority. The shareholder writes the manager's incentive scheme and possibly reports evidence to the authority. The authority designs a leniency policy to deter fraud by both (i) exacerbating agency problems within non-compliant firms and (ii) alleviating them within compliant firms. Depending on the authority's ability to sanction the manager, it may be socially desirable to instigate a within-firm race to the courthouse.