The Economics Of Corporate Crime

July 25, 2012 in Daily Bulletin

In a couple of posts The Economist took a look at the Economics of corporate crime:

  • If we assume rational actors then corporations are likely to commit crimes if the potential benefits outweigh the costs.
  • If we assume that we detect corporate crimes 10% of the time and that we fine them 40% of revenue, then the expected cost of committing the crime is only 4%. The gains could be much higher – creating an incentive to commit the crime.
  • One way to reduce crime then would be to massively increase fines.
  • However they shouldn’t be prohibitively high since there might be false convictions, and it could lead to less competition.
  • America with penalties of up to 40% does a better job than Britain which maxes penalties at 10%.

To read more including the influential economist who helped established thinking about the subject, the economist who believes that we should let the free market sort it out, recent examples of corporate wrong-doing, how fines have changed over time, how regulators should act, and how this relates to class action law suits, click here and here.

Source: The Economist