Public Disclosure, Private Revelation or Silence: Whistleblowing Incentives and Managerial Policy

The public revelation of organizational wrongdoing by insiders, whistleblowing, is widely reported, economically significant and can be extremely costly to the whistleblowers. We develop a model of whistleblowing involving a manager and an employee. Each has a privately known type that specifies the relative weight placed on social rather than personal payoffs. The manager chooses a whistleblowing policy consisting of conditional penalties for various employee actions; the employee observes the policy and chooses between saying nothing, revealing a (privately observed) socially costly violation to the manager, or whistleblowing. Given common knowledge of manager types we characterize equilibrium whistleblowing policies and employee behavior. We show that there may be a nonmonotonic relationship between the severity of the violation and the likelihood of whistleblowing. When manager types are private information we provide sufficient conditions for a separating equilibrium. Managerial choice of whistleblowing policies thus serves a dual purpose: providing incentives for reporting violations and providing information to employees regarding the willingness of the manager to fix violations that are privately reported.