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May 09, 2006

Comments

KipEsquire

Your thesis still falls flat for a very simple reason: "fraud" is not synonymous with "breach of contract."

Your answer to the problem of securities fraud is simply to assume it away. Not especially persuasive.

Richard Phillips

It seems to me that criminalization has nothing to do with the victim knowing the risks or not. For example, almost everyone is constantly and knowingly assuming several violence-related risks (e.g., by walking on a street and being subject to an armed robbery).

Contractual punishment is clearly not enough to discipline CEOs. Without criminal sanctions, dishonest executives could always hide money in some fiscal paradise and flee.

Jason

I recommend Bryan Calpan's two-cents over at EconLog.

Joshua Lyle

Re: KipEsquire
I don't think I'd contract services from an "Esquire" that can't envision putting provisions in a contract for dealing with the eventuality of fraud. There are many privately provided means, including insurance, escrow accounts, and arbitration.
Re: Richard Philips
The possibility of retirement in fiscal paradise already exists; the mere existence of criminal punishments has not prevented it, as extradition treaties are not universal.

elliottg

Contract enforcement is frictionless and instantaneou in your utopia.

Richard Phillips

Re: Joshua Lyle

It's true that the possibility already exists, but as criminals they wouldn't be freely allowed to leave the country. You cannot introduce this punishment in a contract. Contractual monetary sanctions mean nothing if they can hide some money and go spend it somewhere else. Criminalization introduces a much higher cost for dishonesty.

Joshua Lyle

Re: elliottg
I'm not sure what the formula is for the friction of contract enforcement, but to my knowledge private arbitration tends to be much less costly than going through the courts. Check out the arrangement used by the Visa Group.
Re: Richard Phillips
I'm not sure what you mean by criminals not being allowed out of the country. I mean, I could go shoot someone today and my passport would not be magically invalidated, although it would likely be revoked or seized upon my arrest. An arbitrator could insist on the surrender of a passport.
Also, contractual costs for fraud can be set very high. What if 95% of an executive's compensation was held in escrow until five years after the termination of his or her contract? In most cases, that's certainly enough money to send a guy to a fiscal paradise and hire a bounty hunter or assassin.

Lonny Paul

The most disturbing fact is that so many of today's largest companies find that their CEOs, Board Members and other top staff are and have committed fraud, embezzlement and committed other high crimes - and are generally still covered by their contract. Why?

Shouldn't the SEC push for transparency allow shareholders to know if a corporate executive is committing acts which are against the companies ethics, policies or have had any impact financially on the company (whether it is 'put back' or not)?

Many sitting CEOs have been caught with their hands in the cookie jar - but as long as they hit their goals they are 'golden.'

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