The Hidden Costs of Whistleblower Protection

We conduct a laboratory experiment to analyze cooperative behavior between a manager and an employee in the presence of misbehavior and protected whistleblowing. Before taking part in a trust game with her employee, a manager has the opportunity to embezzle money at the expense of a third party. Her behavior is observed by the unaffected employee who may trigger an investigation by a report. We vary the framework with respect to monetary incentives and anonymity in case of a report and compare misbehavior, reporting and cooperative behavior across treatments. Our results suggest that a whistleblower law could deter wrongdoing, but could also have a detrimental effect on cooperation in organizations when it increases the probability for false whistleblowing.