Making regulation fit by taking irrationality into account: the case of the whistleblower

Abstract

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.

Intention without action? Differences between whistleblowing intention and behavior on corruption and fraud

“…Such whistleblowers have been shown to be an effective way to reduce damages and discipline organizations (Bowen et al., 2010; Call et al., 2018; Wilde, 2017). But although countries continue to pass laws that protect or reward whistleblowing (Oelrich, 2019) and organizations implement whistleblowing systems (Association of Certified Fraud Examiners, 2018), whistleblowers still face severe negative consequences, such as loss of employment, retaliation by colleagues, and superiors, or even prosecution (e.g., Alford, 2001; Kenny et al., 2019; Park et al., 2020). Due to its importance, research on whistleblowing spans across several professions and disciplines, including auditing (e.g., Curtis & Taylor, 2009; Latan et al., 2018), accounting and management (e.g., Andon et al., 2018; Cassematis & Wortley, 2013; Keenan, 1995), nursing and medicine (e.g., Moore & McAuliffe, 2012; Ohnishi et al., 2008), sports (e.g., Erickson et al., 2018), military (e.g., Rehg et al., 2008), and police (e.g., Park & Blenkinsopp, 2009).…”

Taking it outside: A study of legal contexts and external whistleblowing in China and India

“…This is in line with major scandals in India, in which whistleblowers even paid disclosure with their lives, which may increase reluctance to disclose a wrongdoing internally (Gupta, 2015). Oelrich (2019) uses a sample of German business students to show that the impact of negative consequences is stronger than the incentive of financial reward systems for external whistleblowing. Rehg et al (2008) also show that retaliation is positively associated with external channel use over internal disclosure in a US sample.…”

“…However, regulation is unevenly distributed across countries. The United States of America (US) and recently Europe introduced comprehensive whistleblowing laws aimed at whistleblowing protection (Mogielnicki, 2011;Oelrich, 2019). As a result, more and more companies introduce whistleblowing systems and channels inside the company.…”

“…The predominant view there is that internal channels are preferred to external ones and that retaliation is a relevant factor in this decision process. Other research has focused on the relevance of laws for whistleblowing, discussing several legislative advances (Moberly, 2007;Mogielnicki, 2011;Oelrich, 2019). It is not surprising that much research focuses on the US, which led reforms worldwide with the introduction of the Sarbanes-Oxley Act (SOX) in 2002 and Dodd-Frank Act (DFA) in 2010.…”

Untitled

“…2011 metais atliktame tyrime dėl korupcijos pasireiškimo rizikos Europoje 11 buvo nurodoma, kad tik dvi valstybės -Didžioji Britanija ir Norvegija -turi visapusius teisės aktus, reglamentuojančius pranešėjų apsaugą, kurie apima tiek viešojo, tiek privataus sektorių darbuotojus. Jau 2017 metais ES valstybės narės santykinai buvo pasidalijusios į dvi stovyklas: maždaug vienodas skaičius valstybių buvo priėmęs specialius pranešėjų apsaugą reguliuojančius įstatymus, o kita pusė įtvirtino specialias teisės normas dėl pranešėjų apsaugos šakiniuose teisės aktuose (pavyzdžiui, Darbo kodekse) 12 . 2019 metus galima įvardinti lūžio metais pranešėjų apsaugos srityje ES.…”