On Cheating and Whistleblowing

We study the role of whistleblowing in the following inspectiongame. Two agents who compete for a prize can either behave legallyor illegally. After the competition, a controller investigates the agents’behavior. This inspection game has a unique Bayesian equilibriumin mixed strategies. We then add a whistleblowing stage, where thecontroller asks the loser to blow the whistle. This extended game hasa unique perfect Bayesian equilibrium in which only a cheating loseraccuses the winner of cheating and the controller tests the winner ifand only if the winner is accused of cheating. Whistleblowing reducesthe frequencies of cheating, is less costly in terms of test frequencies,and leads to a strict Pareto-improvement if punishments for cheatingare sufficiently large.