A POLITICAL ECONOMY THEORY OF CORPORATE CRIME LEGISLATION

Vikramaditya S. Khanna

Boston University School of Law Working Paper 03-04

Abstract

Corporate crime has once again become an important issue on the U.S. legislative agenda leading Congress and the various regulatory bodies to tighten the law and enhance honesty and completeness in disclosure. However, the continued and rather explosive growth of corporate crime legislation leaves one with a rather strange puzzle: how can such a state of the world arise? After all, corporations and business interests are considered some of the most, if not the most, powerful and effective lobbyists in the country. Yet, we witness the continued expansion of legislation that criminalizes their behavior (one estimate suggests over 300,000 federal regulatory offenses that can be prosecuted criminally). How could this have happened? This paper sets out to answer this puzzle.

An answer is important not only for understanding the political dynamics of current regulation, but also because it provides insights into the effectiveness of our current approach for regulating corporate wrongdoing. Overall, my analysis suggests that most corporate crime legislation arises at times when there is a large public outcry over a series of corporate scandals during or around a downturn in the economy. In such a situation Congress must respond and corporate crime legislation may be the preferred response for some corporate interests. This is because it satisfies the public outcry while imposing relatively low costs on corporate interests, avoiding legislative and judicial responses that are more harmful to their interests, and sometimes helping to deflect criminal liability away from managers and executives and on to corporations. This explains not only the impressive growth of corporate crime legislation, but also leads to some surprising normative conclusions. In particular, it leads to the counter-intuitive result that if one starts with the view that there is under-deterrence of corporate wrongdoing then one would probably prefer to reduce corporate criminal liability and focus more on corporate civil liability and managerial liability.

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Vikramaditya S. Khanna Contact Information

vkhanna@umich.edu (email address for Vikramaditya S. Khanna) who is now at The University of Michigan Law School.

University of Michigan at Ann Arbor - Law School
625 South State Street
Ann Arbor, Michigan 48109-1215
(734) 615-6959 (Phone)
(734) 764-8309 (Fax)

An older version of this paper was posted under the title: "A Political Economy Theory of Corporate Crime Legislation"

Michigan Law and Economics Research Paper No. 03-012

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