I compare two approaches employers can use to induce workers to blow the whistle on internal misconduct such as co-worker theft. Employers can improve control over their resources and mitigate their substantial economic losses from internal misconduct if they can induce workers who observe such misconduct to report it. Prior research suggests that non-financial motivations drive worker whistle-blowing. Consistent with this perspective, employers in practice rarely offer workers explicit financial rewards for whistle-blowing but instead rely on workers’ non-financial motivations to blow the whistle. My dissertation compares the economic and behavioral effects of this approach relative to offering workers an explicit financial reward for whistle-blowing. My study examines whistle-blowing using both analytical and experimental research methods. First, I formulate an analytical model of whistle-blowing that integrates behavioral theory to help explain the conditions under which employers would prefer to induce whistle-blowing by relying on workers’ non-financial motivation versus offering workers an explicit financial reward. I find that neither approach strictly dominates, but rather that the optimal approach depends on the social norms that govern the interactions between workers and employers. My model also predicts that the approaches are mutually exclusive, i.e., employers will induce whistle-blowing by relying either on workers’ non-financial motivations or on their financial self-interest, but not on both. Second, I conduct experimental labor markets to determine whether employers can improve their welfare by offering workers an explicit financial reward for whistle-blowing and the behavioral consequences of doing so. I find that employers can induce more whistle-blowing and earn higher payoffs by offering workers explicit financial rewards for whistle-blowing, but that this comes at the cost of decreasing workers’ non-financial motivation to blow the whistle. My study contributes to the theoretical understanding of whistle-blowing and provides practical insights that will help employers decide whether to offer workers an explicit financial reward for whistle-blowing. In turn, this should help employers design better incentive contracts to induce whistle-blowing and improve their welfare. I also discuss some potentially fruitful avenues for future research on whistle-blowing that could extend the analytical and experimental findings documented in my study.
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