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Market vs. regulatory incentives for whistleblowing

The Financial Times notes that

New US whistleblowing incentives within the Dodd-Frank financial reform act – that could net informants multimillion dollar pay-outs – are likely to generate a surge in allegations against US-listed companies and Wall Street banks, lawyers say. * * *[F]inancial industry bodies and lawyers representing companies warned that the scale of the potential pay-outs could generate rogue tip-offs by disaffected employees, wasting resources for both the employer and regulator.

But as I argued recently over at Forbes.com, that wouldn’t necessarily be a problem if we let informed insiders trade on knowledge of corporate wrongdoing:

The beauty of the insider trading approach to uncovering fraud is that it reduces the need for a lot of the Dodd-Frank whistle-blowing apparatus. The market decides through its price movements how important or original the information is and computes the insider’s compensation for disclosing it.

If you want the right amount of anything, it’s usually better to leave the decision to the market rather than Congress.

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