Whistleblower protection: Theory and experimental evidence

Abstract

Whistle-blowing by employees plays a major role in uncovering corporate fraud. Various recent laws aim at improving protection of whistle-blowers and enhancing their willingness to report. Evidence on the effectiveness of such legislation is, however, scarce. Moreover, critics have raised worries about fraudulent claims by low-productivity employees. We study these issues in a theory-guided lab experiment. Easily attainable ("belief-based") protection indeed leads to more reports, both truthful and fraudulent. Fraudulent claims dilute prosecutors' incentives to investigate, and thereby hamper deterrence. These effects are ameliorated under more stringent ("fact-based") protection.

Libel Bullies, Defamation Victims, and Litigation Incentives

“…Both players' expected payoffs from such an action may be negative, but an exposed employer may still be willing to incur that cost in order to deter future whistleblowing. Furthermore, Mechtenberg, Muehlheusser, and Roider (2020), for instance, argue that being too tough on employers who dismiss a whistleblower may create incentives for low productivity employees to make allegations that they know are false just in order to gain whistleblower status in an attempt to secure their job. In this setting, our model implies that the employer's incentives to punish a whistleblower in discord with whistleblower protection law is decreasing in her expectations of future whistleblowers' incentives to blow the whistle.…”

Whistleblower rewards, false reports, and corporate fraud

“…The introduction of the policy was concurrent with a large media campaign attracting attention to the hotline with the intention to boost the awareness and therefore the deterrence effects of the 7 Somewhat less related is Heyes and Kapur (2009), examining theoretically how regulators should respond to whistleblowers' tip-offs, but assume that monetary rewards are not present and focus on alternative psychological theories of why they blow the whistle in the absence of financial incentives to do it. Mechtenberg et al (2017) study the possibility that even whistleblower protection is abused by low productivity employees to postpone termination by filing fraudulent claims, suggesting that it may be efficient to let protection only start after the court has judged on the whistleblower's claim. It assumes, however, that judicial proceedings are instantaneous, so that firms cannot retaliate against whistleblowers while the court case is ongoing (many years in many countries); and that whistleblowers cannot be punished for filing fraudulent claims (although innocent firms will have a significant probability of winning in court against them, and all the resources and incentives-disciplining other employees-to pursue fraudulent whistleblowers as harshly as possible).…”

The Effects of Private Damage Claims on Cartel Activity: Experimental Evidence

“…This scheme corresponds to the former Hungarian legislation before the implementation of the directive on antitrust damage actions (Buccirossi et al (2020); European Commission ( 2014)). In a related piece of experimental evidence, Mechtenberg et al (2020) analyze whistleblowing in the context of corporate fraud. They find that an increase in reports can be triggered by better whistleblower protection.…”