Whistle-Blowing and the Incentive to Hire


In this article we focus on a previously neglected cost of whistle-blower awards: employers may base their hiring decisions, on the margin, not on the productivity of an employee but rather on the probability that the employee will become a whistle-blower. We develop a three-stage model to examine how productivity losses due to distortions at the hiring stage influence optimal whistle-blower rewards. We characterize optimal rewards for whistle-blowing, and show that the size of these rewards depend, inter alia, on the relative values of workers' productivity, the punishment for crime, employees' whistle-blowing costs, the degree of non-transferability of the employee's costs, and the social cost of crime.