An Economic Model of Whistle-Blower Policy

ldquo;Whistle-blowingrdquo; is an increasingly common element of regulatory enforcement programs and one that is encouraged by recent legislation in the United States and elsewhere. We examine how responsive regulators should be to whistle-blower tip-offs and how severe should penalties be for wrongdoers detected in this way. Competing psychological theories as to what motivates employees to become whistle-blowers are operationalized as alternative behavioral heuristics. Optimal policy depends upon the motives attributed to whistle-blowers - which of the theories you subscribe to - but is not in general characterized by maximal penalties nor routine pursuit of complaints, even when pursuit is costless