Self-Reporting Schemes and Employee Wrongdoing

Abstract

We study self-reporting schemes in the context of employee wrongdoing. We model the interaction between a regulator and a continuum of firms, where each firm has one employer and one employee. Within the scope of their employment, employees can take an action beneficial to themselves but harmful to their employer and society. Employers design employment contracts that either prevent the harmful act or tolerate it. We investigate whether corporate and individual sanctions should be reduced when employees confess to having committed the harmful act. In an extension, we let employers monitor their employees, and investigate whether corporate and individual sanctions should be reduced when employers disclose incriminating evidence. We use the resulting insights to discuss policy implications.

Keywords: employee wrongdoing, white-collar crime, self-reporting, public enforcement

JEL Classification: K21, K42, L40