Reward And Punishment: Research On The Effectiveness Of Internal Mutual Supervision System In Controlling Financial Crimes

Nowadays, high level of financial crimes, especially officials'corruption, becomes one of the most vital social problems in China. Financial crimes erode the public interest, add instability to the society and severely impede the economic and social development. Therefore, finding an effective way to control financial crimes is a very important and popular task in China.The government can adopt a reward and punishment policy to control financial crimes. Traditional economic theories usually advocate severe-punishment on financial criminals. However, in reality, severe-punishment policy does not work well in China.Therefore, I build a new game theory model named Mutual Supervision Model, trying to:1) explain why severe punishment sometimes surprisingly encourages people to commit a financial crime; 2) reveal individuals'real reaction towards different levels of reward and punishment; 3) find out a more effective way to control the financial crimes.The model in this paper indicates that a new reward policy, rewarding people who informs against others, is very effective in controlling financial crimes. However, once the criminal is caught, reward (leniency) for informing against others is counterproductive. On the other hand, the effectiveness of punishment policy is uncertain:when the information is perfect, severe punishment is completely irrelevant, or even counterproductive, to controlling financial crimes; when the information is incomplete, the severe punishment on one hand encourages officials to obey the rule, on the other hand discourages officials to supervise each other.I also run an economic experiment to find out whether individuals in reality act the same way as the model predicts. The result of the experiment is positive:the conclusions and policy recommendations of this model can be applied to real situation.