Thursday, April 3, 2014
Manuel Utset presents a new approach for thinking about corporate criminal sanction. He examines the effect of criminal sanction on corporate actors with time inconsistent ("TI") preferences and shows that traditional approaches to deterrence will under-deter these corporate actors. He concludes that "TI corporate actors-and thus corporations-will be systematically under-deterred by the sanctions that are optimal for TC actors [i.e., actors with time consistent preferences]."
Modeling firms with TI preferences, Utset "shows that principals, gatekeepers, and regulators...will underinvest in monitoring and detection." To encourage the proper level of investment, he supports certain provisions in Sarbanes Oxley that "reduce[s] the immediate costs of compliance ... and reduce[s] the immediate rewards from violating the law." He also supports "commitment devices" found in the Dodd-Frank Act.
My contribution to Utset's interesting and important research starts with three observations. First, the market economy places on TI corporate actors dynamic pressures that differ from those human actors face. For humans, punishments set at levels appropriate for actors with time consistent behavior (TC-ers) will not deter TI-ers. Human TI-ers will persist in their behavior, imposing (long run) costs on themselves and others-unless they are incarcerated for long periods of time, executed, or otherwise effectively deterred.