1 Introduction In the United States, but generally not in Europe, firms are criminally liable for crimes committed by their employees within the scope of the firm and to its benefit. The nature of corporate crime comprises essentially fraud (usually against the government ), environmental violations, and antitrust violations Cohen, 1996) Corporate criminal liability puts a serious challenge to the economics of enforcement. Are corporate crimes different from other crimes? Are these crimes best deterred by punishing individuals, punishing corporations, or both? What is optimal structure of sanctions? Should corporate liability be criminal or civil? This paper has two major contributions to the literature. First, it pro- ides a common analytical framework to most results presented and largely discussed in the field. In second place, by making use of the framework we provide new insights into how corporations should be punished for the offenses committed by their employees Evidence suggests that wrongdoing by corporations is largely an agency cost. It appears to be the case that the managers do not commit corporate crimes to serve the interests of the shareholders( Alexander and Cohen, 1996 and 1999 ). Thus, the usual economic model of crime needed to be extended to a principal and agent framework in order to explain corporate crime Even though the economic analysis of crime is now over 30 years old Becker's(1968)analysis of optimal punishment has only recently been ap- plied to corporate crime. While most of the literature surveyed in Polinsky and Shavell(2000) has been concerned with optimal sanctioning of rational individuals, recent theoretical analysis has focused on employee-manager re- lationship. Given the existence of different interests, one aims at designing the appropriate incentives to deter offenses. Under an optimal design, it is useful to discuss if it is desirable to hold an employee liable for corporate crimes(Polinsky and Shavell, 1993; Shavell, 1997), or what the structure of optimal corporate sanctions should be(Arlen, 1994) In Becker's model, an offense is committed by a rational individual who decides whether or not to commit the crime based on the probability and severity of punishment. However, in the context of corporations or organi1 Introduction In the United States, but generally not in Europe, firms are criminally liable for crimes committed by their employees within the scope of the firm and to its benefit. The nature of corporate crime comprises essentially fraud (usually against the government), environmental violations, and antitrust violations (Cohen, 1996). Corporate criminal liability puts a serious challenge to the economics of enforcement. Are corporate crimes different from other crimes? Are these crimes best deterred by punishing individuals, punishing corporations, or both? What is optimal structure of sanctions? Should corporate liability be criminal or civil? This paper has two major contributions to the literature. First, it pro￾vides a common analytical framework to most results presented and largely discussed in the field. In second place, by making use of the framework, we provide new insights into how corporations should be punished for the offenses committed by their employees. Evidence suggests that wrongdoing by corporations is largely an agency cost. It appears to be the case that the managers do not commit corporate crimes to serve the interests of the shareholders (Alexander and Cohen, 1996 and 1999). Thus, the usual economic model of crime needed to be extended to a principal and agent framework in order to explain corporate crime. Even though the economic analysis of crime is now over 30 years old, Becker’s (1968) analysis of optimal punishment has only recently been ap￾plied to corporate crime. While most of the literature surveyed in Polinsky and Shavell (2000) has been concerned with optimal sanctioning of rational individuals, recent theoretical analysis has focused on employee-manager re￾lationship. Given the existence of different interests, one aims at designing the appropriate incentives to deter offenses. Under an optimal design, it is useful to discuss if it is desirable to hold an employee liable for corporate crimes (Polinsky and Shavell, 1993; Shavell, 1997), or what the structure of optimal corporate sanctions should be (Arlen, 1994). In Becker’s model, an offense is committed by a rational individual who decides whether or not to commit the crime based on the probability and severity of punishment. However, in the context of corporations or organi- 2