SITE Working Paper Series,
Stockholm School of Economics, Stockholm Institute of Transition Economics

Abstract: It is often claimed that rewards for whistleblowers lead to fraudulent reports, but for several US programs this was not a major problem. We model the interaction between rewards for whistleblowers, sanctions against fraudulent reporting, judicial errors and standards of proof in the court case on the whistleblower's allegations and the possible follow-up for fraudulent allegations. Balancing whistleblower rewards, sanctions against fraudulent reports, and courts' standards of proof is essential for these policies to succeed. When the risk of retaliation is severe, larger rewards are needed and so are tougher sanctions against fraudulent reports. The precision of the legal system must be sufficiently high, hence these programs are not viable in weak institution environments, where protection is imperfect and court precision low, or where sanctions against false reporting are mild. Internal reporting channels may interfere with the external ones in unexpected ways.

Keywords: Whistleblowers rewards; False allegations; Judicial errors; Standard of proof; Corporate fraud

JEL-codes: G28; K42

27 pages, First version: June 20, 2017. Revised: August 29, 2017.

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