where the government is the principal, the shareholders are the supervisors and the employees are the agents. Note in passing that most of the literature characterizes the problem as the corporation being the principal and the employees the agents. Our characterization seems more appropriate and more useful as discussed later Y One important question is which party(the government or firm)is the least-cost enforcer. It could be the case that imposing individual criminal li- bility might be less expensive than imposing high monitoring costs on firms However, the standard case for corporate liability points out that firms have better information, thus providing less expensive preventive measures. As Arlen and Kraakman(1997)characterize, a firm could be superior sanction- er because their enforcement measures are more credible and effective The second important point is how the firm might align the interests of its employees with its own. In particular, the analysis depends on whether or not the firm has the ability to provide correct incentives. Corporate and individual sanctions are substitutes in order to deter crime as long as the employee can bear the full cost of the optimal monetary fine. If the penalty is imposed on the firm, it will be passed along to its employees by lowerin salaries. When the firm is unable to shift the penalty to the employee, the penalty should be placed directly on the employee and the corporation must monitor the employee' s action to prevent the occurrence. Aligning the interests of the corporation with those of the government is also expensive(Block, 1991; Alexander and Cohen, 1999). The general result seems to be that poorly performing corporations are more likely to engage in crime(Macey, 1991). Alexander and Cohen(1996) also find that larger firms are more likely to engage in crime than smaller firms. Weak internal controls and concern with short-term financial arrangements, and less concern with long run portfolio diversification n to be positively related to cor crime(Baysinger, 1991). Consequently, performance and dimension of firm affect the government's cost in monitoring the corporation Inducing optimal monitoring and ensuring internal sanctioning (that is credibility of firm's enforcement policy) is not immune to controversy. Arlen (1994)identifies a ' potentially perverse effectby which holding firms(vicari- COhen(1996)finds that sanctions increase with harm and increased en the organization cannot afford to pass along to its employees the 4where the government is the principal, the shareholders are the supervisors, and the employees are the agents. Note in passing that most of the literature characterizes the problem as the corporation being the principal and the employees the agents. Our characterization seems more appropriate and more useful as discussed later. One important question is which party (the government or firm) is the least-cost enforcer. It could be the case that imposing individual criminal li￾ability might be less expensive than imposing high monitoring costs on firms. However, the standard case for corporate liability points out that firms have better information, thus providing less expensive preventive measures. As Arlen and Kraakman (1997) characterize, a firm could be ‘superior sanction￾er’ because their enforcement measures are more credible and effective. The second important point is how the firm might align the interests of its employees with its own. In particular, the analysis depends on whether or not the firm has the ability to provide correct incentives. Corporate and individual sanctions are substitutes in order to deter crime as long as the employee can bear the full cost of the optimal monetary fine. If the penalty is imposed on the firm, it will be passed along to its employees by lowering salaries. When the firm is unable to shift the penalty to the employee, the penalty should be placed directly on the employee and the corporation must monitor the employee’s action to prevent the occurrence.1 Aligning the interests of the corporation with those of the government is also expensive (Block, 1991; Alexander and Cohen, 1999). The general result seems to be that poorly performing corporations are more likely to engage in crime (Macey, 1991). Alexander and Cohen (1996) also find that larger firms are more likely to engage in crime than smaller firms. Weak internal controls and concern with short-term financial arrangements, and less concern with long run portfolio diversification, seem to be positively related to corporate crime (Baysinger, 1991). Consequently, performance and dimension of the firm affect the government’s cost in monitoring the corporation. Inducing optimal monitoring and ensuring internal sanctioning (that is, credibility of firm’s enforcement policy) is not immune to controversy. Arlen (1994) identifies a ‘potentially perverse effect’ by which holding firms (vicari- 1Cohen (1996) finds that sanctions increase with harm and increased individual liability when the organization cannot afford to pass along to its employees the fine. 4