Battle for our Souls

A Psychological Justification for Corporate and Individual Liability for Organizational Misconduct

In this Article, we undertake the first analysis of optimal individual and corporate liability for organizational misconduct that incorporates crucial insights from psychology about people’s motivations, their decision-making processes, and how laws and organizations affect people’s behavior. Specifically, we develop an evidence-based deterrence theory predicated on empirical evidence from psychology that people have other-regarding preferences, the law can deter by expressing social condemnation as well as through sanctions, people rely on intuitive decision-making processes to make most decisions, and organizations influence deterrence by shaping employees’ decision-making environment. Our theory improves on both classical deterrence theory and expressive law theory. We show that optimal deterrence through expressive law requires both individual liability and corporate liability that both eliminates companies’ expected profit from misconduct and induces them to detect, self-report and cooperate. Our framework has implications beyond liability for organizational misconduct.

* Norma Z. Paige Professor of Law at New York University School of Law.

** Frank Henry Sommer Professor of Law at New York University School of Law. We benefitted from the helpful comments of Ian Ayres, Miriam Baer, Oren BarGill, Stefan Bechtold, Bernard Black, Samuel Buell, Emiliano Catan, Kevin Davis, Mihailis Diamantis, Brandon Garrett, Jeffrey Gordon, Daniel Hemel, Robert Lee Hotz, Emily Kadens, Joshua Kleinfeld, Donald Langevoort, Alex Lee, Katherine Litvak, Veronica Root Martinez, Richard McAdams, Geoffrey Miller, Mariana Pargendler, A. Michael Polinsky, Benjamin van Rooij, Catherine Sharkey, Michael Simkovic, Avani Sood, Holger Spamann, Matt Spitzer, Eyal Zamir, and David Zaring, as well as participants at the Conference on Behavioural Ethics Meets Corporate Governance held at Hebrew University in Jerusalem; the Conference on How Law Changes What You Want: Positive and Normative Effects of Law on Values and Preferences held at the University of California at Berkeley School of Law; the Conference at the University of Amsterdam; Law and Economics Workshops at Harvard Law School, New York University School of Law, Northwestern University School of Law, and the University of Chicago School of Law; Colloquium on Corporate and Commercial Law at the University of Southern California School of Law; and Corporate Law Academic Webinar Series (“CLAWS”). We would also like to thank our research assistants, Emma Grover and Arielle Rosen.

The full text of this Article is available to download as a PDF.