ously) liable for offenses committed by its employees can increase enforcement costs. If the information that the firm acquires can be used to increase its own probability of incurring liability, the firm will not monitor optimally. In order to tackle this effect, a composite liability regime where some duty-based lia- bility or mitigation provisions are included has been proposed(Arlen, 199 costs are high, strict liability could be preferable. po Arlen and Kraakman, 1997).However, it has been noted when information The role of risk aversion is not explicitly considered in our paper. Port folio diversification means shareholders behave as if they were risk neutral whereas managers are risk averse. Criminal liability increases the risk of projects, making managers less willing to take them. However, because share- holders are risk neutral, they should be more willing to accept projects that involve criminal offenses, ceteris paribus. These observations suggest that managers should be pushed by shareholders to take projects that involve criminal offenses. Corporation criminal liability would be justified as a de- vice to deter this type of behavior by shareholders(Macey, 1991). Clearly there is an inconsistency with empirical evidence(Romano, 1991 ): Managers do not commit corporate crimes to serve the interests of the shareholders Our paper is organized the following way: the basic model is presented in section two, while sections three (moral hazard), four(reputation loss five(internal punishment), and six(internal control) consider different ex- tensions, Final remarks are addressed in section seven 2 Basic model The underlying results of the literature come from the principal-agent model in which the firm s choice of compensation contract affects the agent's choice of care in avoiding crime. In that respect, our model draws on Alexander and Cohen(1999) and Gans(2000 2Duty-based liability is imposed only when the firm itself violates a legal duty, and not henever a crime occurs as in strict liability. 3An important extension of corporate criminal law is the potential use of secondary liability beyond the firm. In particular, liability ofgatekeepers' as a third party monitor ing the corporation could be useful. Examples include criminal liability of auditors andously) liable for offenses committed by its employees can increase enforcement costs. If the information that the firm acquires can be used to increase its own probability of incurring liability, the firm will not monitor optimally. In order to tackle this effect, a composite liability regime where some duty-based lia￾bility or mitigation provisions are included has been proposed (Arlen, 1994; Arlen and Kraakman, 1997).2 However, it has been noted when information costs are high, strict liability could be preferable.3 The role of risk aversion is not explicitly considered in our paper. Port￾folio diversification means shareholders behave as if they were risk neutral, whereas managers are risk averse. Criminal liability increases the risk of projects, making managers less willing to take them. However, because share￾holders are risk neutral, they should be more willing to accept projects that involve criminal offenses, ceteris paribus. These observations suggest that managers should be pushed by shareholders to take projects that involve criminal offenses. Corporation criminal liability would be justified as a de￾vice to deter this type of behavior by shareholders (Macey, 1991). Clearly there is an inconsistency with empirical evidence (Romano, 1991): Managers do not commit corporate crimes to serve the interests of the shareholders Our paper is organized the following way: the basic model is presented in section two, while sections three (moral hazard), four (reputation loss), five (internal punishment), and six (internal control) consider different ex￾tensions. Final remarks are addressed in section seven. 2 Basic Model The underlying results of the literature come from the principal-agent model in which the firm’s choice of compensation contract affects the agent’s choice of care in avoiding crime. In that respect, our model draws on Alexander and Cohen (1999) and Gans (2000). 2Duty-based liability is imposed only when the firm itself violates a legal duty, and not whenever a crime occurs as in strict liability. 3An important extension of corporate criminal law is the potential use of secondary liability beyond the firm. In particular, liability of ‘gatekeepers’ as a third party monitor￾ing the corporation could be useful. Examples include criminal liability of auditors and lawyers. 5