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Financial penalties imposed on malfeasant corporations can produce “collateral consequences,” or unintended negative impacts on employees, customers, and society more broadly. I show that the vast majority of government bodies that assess organizational penalties have adopted policies to reduce corporate liability where collateral consequences might otherwise result. Moreover, I demonstrate that officials do reduce penalties in line with these policies, undermining deterrence and compensation of harmed parties. However, evidence from reductions given to publicly-traded firms suggests that officials are often wrong in their assessment of firms’ financial health, thereby awarding reductions to healthy firms where collateral consequences are unlikely to occur. I discuss how officials should approach imposing penalties when they are concerned about prospective collateral consequences.
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