| Abstract: | Economists who have studied crime and punishment have long advocated imposing an ‘optimal penalty’ equal to harm divided by the probability of detection. Recent theoretical advances have augmented this theory in the context of corporate crime, by examining the role of individuals within an organization convicted of crime. This revised theory takes into account the principal-agent relationship inherent in the employer-employee contract. This paper reviews optimal penalty theory as it applies to corporate crime, and derives its testable implications. These empirical implications are then tested against a sample of organizations convicted of federal crimes in the USA. It is shown that current prosecutorial and sentencing practice is consistent with optimal penalty theory to the extent that it calls for (1) increased sanctions with increased harm, and (2) increased individual liability when the organization cannot afford to compensate for the harm imposed. Several other empirical issues are examined, including the penalty for going to trial and the ‘deep pocket’ effect. |
