Faculty of Economics and Business Administration Publications Database

Whistle-Blowing and Incentives in Firms

Guriev, Sergei
Volume: 21
Number: 4
Pages: 1007 - 1027
Month: Winter
ISSN-Print: 1058-6407
Link External Source: Online Version
Year: 2012
Abstract: 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.