Clinging onto the cliff: a model of financial misconduct
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Accepted manuscript
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DOI
Authors
Chen, A.J.
Lee, Suk
Zapatero, Fernando
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Accepted manuscript
OA Version
Citation
A.J. Chen, S. Lee, F. Zapatero. "Clinging Onto the Cliff: A Model of Financial Misconduct." SSRN,
Abstract
We propose a novel model of financial misconduct. In line with empirical evidence thereon,
our model interprets white-collar crime as gambles with skewed payoffs, as opposed to Becker's
analysis of criminal activity that postulates positive expected payoffs associated to crime. In
our model, criminal motives arise as optimal responses to a "tunnel vision" that engross firm
managers, whereby the intense pressure to attain the focused goal triggers strong demand for
negatively skewed bets in the form of crime. The key mechanism is consistent with the notion of a
"slippery slope to crime" that is finding growing support in the literature as well as in practitioner
accounts. Comparative static analyses on the model reveal several empirical implications {for
example, a "pecking order of crime" indicating that serious infringements will only follow the
depletion of the more preferred (and possibly prevalent) option of milder incursions of law, e.g.,
minor violations of financial reporting standards - many of which find empirical support in the
literature.