When do employers benefit from offering workers a financial reward for reporting internal misconduct?

Some employers offer workers financial rewards for reporting internal misconduct that harms the employer, and recent press articles suggest more employers should adopt this practice to increase the rate of internal whistleblowing. However, rewards are costly, and no consensus exists about whether employers ultimately benefit from offering them. I analyze the cost-benefit tradeoff facing employers as they decide whether to offer whistleblowing rewards and find that as the pre-existing rate of internal whistleblowing increases, the incremental expected cost of offering a reward increases relative to the incremental expected benefit. Consequently, the net expected economic effect of offering a reward is a function of the current rate of whistleblowing in the firm. I predict and, using an experiment, find that the level of fixed compensation paid to workers and the extent to which they believe reporting internal misconduct constitutes a moral obligation affect the pre-existing rate of internal whistleblowing, with the rate increasing as these two factors increase. Further, I also predict and find that an increase in either factor tempers the net economic benefit of offering a whistleblowing reward. My results suggest that certain types of employers are more likely than others to benefit economically from offering a financial reward for internal whistleblowing, which can help explain the variation observed in practice with respect to employers’ use of this approach. I discuss this and other implications of my findings.