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Journal of Law, Economics, and Organization Advance Access published online on January 20, 2009
Journal of Law, Economics, and Organization, doi:10.1093/jleo/ewn027
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© The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Should Firms be Allowed to Indemnify Their Employees for Sanctions?

Wallace P. Mullin*

George Washington University

Christopher M. Snyder**

Dartmouth College

* Department of Economics, George Washington University. Email: wpmullin{at}gwu.edu.

** Department of Economics, Dartmouth College. Email: chris.snyder{at}dartmouth.edu.

Policymakers have questioned whether firms should be allowed to indemnify their employees for personal sanctions for corporate crimes. This article provides the first formal analysis of this form of indemnification. Targeting employees with unindemnifiable sanctions carries the social cost of exposing employees of law-abiding firms to the risk of mistaken government prosecution. Deterrence is typically achieved more efficiently by sanctioning the firm alone. We find the circumstances under which the government should additionally sanction employees to be quite limited and the circumstances under which the government should ban indemnification of these sanctions to be more limited still. One circumstance is when an unindemnifiable employee sanction provides prosecutors with leverage to adjust the employee's sanction in exchange for his cooperation against the firm. (JEL K22, D82, L20)


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