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Whistle Blowing: An Economic Analysis of the False Claims Act

Ben Depoorter and Jef De Mot
Supreme Court Economic Review
Vol. 14 (2006), pp. 135-162
Stable URL: http://www.jstor.org/stable/3655311
Page Count: 28
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Whistle Blowing: An Economic Analysis of the False Claims Act
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Abstract

Whistle blowing, remuneration and immunity are effective tools whenever law enforcement is impeded by information asymmetries. The U.S. False Claims Act (FCA), which allows private individuals to litigate fraudulent claims on behalf of the government, has been instrumental in combating government fraud. In this paper we reveal a number of limitations and weaknesses of rewards as an alternative to punishment-based deterrence. The main findings can be summarized as follows. The gap between social and private incentives negatively affects the decision to file a qui tam case and the timing of whistle blowing. First, the divergence between private and social incentives of whistle blowing generates sub-optimal amounts of whistle blowing litigation in at least two instances. Whistle blowing is underprovided in all cases where free riding by the government discourages potential whistle blowers from initiating a socially valuable case. Whistle blowing is overprovided whenever qui tam private incentives conflict with social enforcement objectives. While the government weighs the wider spectrum of enforcement (the effect of an individual case on a multiple claim suit, etc.), an insider will blow the whistle whenever his expected recovery exceeds the expected costs of litigation. This autonomy of whistle blowers to pursue claims without government involvement, weakens the government's bargaining position towards the fraudulent party. Second, whenever rewards are tied to recovery, bounties create a perverse incentive whereby fraudulent practices are not terminated at a socially optimal point in time. The potential reward race among whistle blowers cannot mitigate this effect fully because the stigma and loss of opportunities on the job market act as internal constraints on whistle blowing.

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