Are Corporate Fines High Enough to Make a Difference?
The last three months have seen several large corporate fines levied in response to various high-profile financial scandals, but an article in The Economist asks if fines are still not high enough to actually deter crime:
The economics of crime prevention starts with a depressing assumption: executives simply weigh up all their options, including the illegal ones. Given a risk-free opportunity to mis-sell a product, or form a cartel, they will grab it. Most businesspeople are not this calculating, of course, but the assumption of harsh rationality is a useful way to work out how to deter rule-breakers.
Extremely high and extremely low fines both carry costs, so The Economist suggests a middle ground: fines that offset the benefits of the crime itself. By that measure, even the large fines recently levied just aren’t high enough to change behavior:
Recent big penalties (see right-hand chart) have been far lower than a crime calculus of this sort would suggest is needed, even allowing for the fact that some firms, like Barclays, get discounts for co-operating with the authorities. Britain looks particularly lenient. Its antitrust laws impose fines of up to 10% of revenues; American regulators levy penalties of up to 40%, and the European Commission goes up to 30%.