This model captures one of the key elements of the value diversion controversy. Within a standard mixed model, we show that shareholders are better off if they allow a certain amount of diversion even if it generates a dead-weight loss.

We present a model of an entrepreneur diverting some of the profits of the firm. Two types of sanctions are taken into account. First, criminal law defines a fine that the entrepreneur must pay to the authority. Second, civil law requires that the wronged agents who have suffered loses obtain...