Noise Reduction: The Screening Value of Qui Tam

Whistle-blowing mechanisms have long been recognized and used as tools to encourage the revelation of hidden information. The information sought is often evidence of otherwise undetectable fraud. An effective mechanism will be one that best deters such fraud. To do this, the mechanism needs to produce high-quality information that is not otherwise lost in the noise of low-quality information. In this paper, we present a model to explore how the use of a court-centric qui tam mechanism as opposed to an agency-driven mechanism can improve whistle blowing along these dimensions.

In doing so, the paper compares two leading mechanisms that have been implemented in high-profile federal statutes. The first is the court-centric qui tam mechanism that is embodied in the False Claims Act. The second is the agency-centric whistleblower system enacted as part of the Dodd Frank Act. 

The model demonstrates that where there is asymmetric information, the qui tam mechanism – which allows whistleblowers to file lawsuits on behalf of the government – serves a central role in screening out low-quality information. This results because the qui tam process imposes a private cost commitment on the plaintiff that produces a separating equilibrium. That, in turn, improves enforcement and deterrence. This suggests the counterintuitive result that increasing costs and lowering rewards for whistleblowers can often lead to better enforcement and less fraud.

This analysis fills a conspicuous gap in the existing literature, which has ignored both the screening value of qui tam and the deterrent effects of whistleblower mechanisms generally.