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Whistle‐Blowing and Incentives in Firms
Author(s) -
Friebel Guido,
Guriev Sergei
Publication year - 2012
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2012.00354.x
Subject(s) - incentive , division (mathematics) , whistle blowing , business , corporate governance , hierarchy , outcome (game theory) , division of labour , stochastic game , accounting , microeconomics , industrial organization , economics , public relations , finance , market economy , political science , arithmetic , mathematics
Whistle‐blowing is an important mechanism of corporate governance. We show that whistle‐blowing has negative effects on productive efficiency by undermining the incentives within a corporate hierarchy. In our model, a top manager intends to overreport earnings; a division manager may have evidence about the intended overreporting. We show that the division manager is more likely to have such evidence when the performance of his own division is low. Top management may offer a bribe to prevent the manager from blowing the whistle. This provides the division manager with an additional payoff when his division’s output is low. Therefore, potential whistle‐blowing undermines the division manager’s incentives to exert effort, which results in a less efficient outcome.