Cindy R. Alexander and Jennifer Arlen
Critics of deferred prosecution agreements claim they undermine deterrence by lowering the cost to firms from reputational damage or stigma resulting from a criminal settlement. We evaluate the claim that the choice of a DPA, instead of a guilty plea, reduces the cost to corporations of reputational damage from a criminal settlement, holding constant other factors such as the identity of the offender and offense magnitude. Criminal settlements cause firms to sustain costs from reputational damage when they cause the release of information that leads interested outsiders—e.g., customers and suppliers—to anticipate an enhanced risk of harm from future dealings with the firm. DPAs could lower the cost of reputational damage if the use of a DPA, instead of a plea, would lead interested outsiders to anticipate a lesser risk of harm from future misconduct, holding all else constant. We consider and reject three potential channels through which the choice of settlement form could plausibly alter the qualitative information about the risk of future misconduct that reaches interested outsiders: direct revelation, prosecutorial selection, and managerial selection. We then turn to the effect of DPAs on the ability of federal agencies to protect their interests by excluding or delicensing firms whose criminal settlement reveals they present an enhanced risk of causing future harm to the agencies’ interests that is best addressed by exclusion instead of mandated reforms. We conclude that agencies may be better able to serve their interests as interested outsiders when prosecutors employ DPAs, rather than pleas, because DPAs leave many agencies free to use permissive exclusion and thus enable them to exclude when, but only when, appropriate.