The Effects of Relying on Financial Incentives vs. Non-Financial Motivation to Induce Internal Whistle-Blowing

Abstract

Employers could recover significant losses arising from internal misconduct, such as worker theft, if co-workers who observed the misconduct blew the whistle. Generally, employers rely on workers’ goodwill to induce whistle-blowing. However, some employers are considering offering workers a financial reward for whistle-blowing, thus relying on financial self-interest to induce whistle-blowing rather than only goodwill. I compare these approaches in a setting in which employers make wage offers to workers for a fixed level of effort; probabilistically incur welfare losses from internal theft that only workers observe; and recover their losses by inducing workers to blow the whistle on theft. I vary whether employers can offer workers a financial reward for whistle-blowing (Reward vs. No Reward condition), but in both conditions I allow them to foster goodwill by offering workers higher wages. As predicted, when making whistle-blowing decisions, workers in the Reward condition perceive lower sensitivity to wage level versus reward level and, also, have less perceived sensitivity to wage level than workers in the No Reward condition. Employers in the Reward condition generally offered a whistle-blowing reward but also offered lower wages than employers in the No Reward condition. Consequently, employers offered similar levels of expected compensation in both conditions. Workers blew the whistle more frequently when offered a reward, and therefore employers earned higher payoffs by offering rewards for whistle-blowing. Using a third condition, I find that the benefits of both approaches exceed the related costs. My findings should help executives make more informed decisions about how to use financial resources to induce whistle-blowing on internal misconduct.