Prospect theory describes people as bounded rational decision maker. What sparked widespread discussion after its initial introduction in 1979 is today criticized for lack of applicability. I use the debate about whistleblowing laws to show that prospect theory may be applied prescriptively in economics as a tool to design effective legislation. Whistleblowing is often seen as an important way to uncover fraud, which causes billions of USD in damages annually. I first examine the fragmented legal landscape across Europe, showing that it can be framed as one favoring rewards or the prevention of losses. I conduct an experiment with 39 university students, wherein legislative incentives are evaluated under a prospect theoretical frame in a setting of ambiguity and high stakes. Results suggest that people exhibit the typical s-shaped value function and loss aversion in line with prospect theory. In addition, their intention to whistleblow is more heavily reduced by losses than increased by gains. The study adds to the scarce literature of prospect theory on decisions in ambiguous contexts-as well as to the applicability of the theory as a prescriptive instrument in designing institutional frames. For whistleblowing in particular, a protection-based approach seems most promising.
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
Whistleblowing is regularly identified as corporate control mechanism to prevent and uncover fraud. We review and compare the legal situation for whistleblowers in the People’s Republic of China and India. In a survey of 942 employees from private companies in both countries, we take a look at the status quo of whistleblowing system implementation, explore preference of channels to disclose fraud or corruption, and analyze under which conditions and what kind of employees prefer external over internal whistleblowing. We find that provisions for mandatory whistleblowing systems can be found in the law of both countries. In China in particular, protection is scattered across many different laws in the private sector. Indian companies seem to have systems in place more often, although this difference becomes smaller the larger the company. The general preference of internal over external channels is similar across countries. Our regression models suggest that external channels are preferred over internal ones when fear of retaliatory measures is higher, the company is smaller, and the whistleblower is female. In line with prior literature, the effect of fear of retaliation is moderated by gender: women are less influenced by retaliation. All in all, implementation of whistleblowing systems seems ubiquitous in both countries; legal protection and comprehensive measures to decrease retaliation are lacking. Additional implications of findings are discussed.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.