Optimal ethics

Imagine that you discover that one of your employees has done something wrong, like accessing information about clients and using it in unethical, though perhaps not illegal manner.  This puts you in the familiar dilemma of a prosecutor:

1. you can punish the employee harshly to boost morale among the "good" employees, and to deter future malfeasance; or 
2. you can offer leniency in exchange for information from the employee that will help you design better safeguards.  

Which option should you choose?

The answer depends on whether the value of the information is bigger than the "cost" leniency, in terms of lower deterrence, or morale.

Note that, just like a prosecutor, you should expect adverse selection.  Only employees who think the leniency looks like a good option will choose it, and those are the ones who have committed more bad acts.  This is just like the adverse selection associated with plea bargaining--pleas are accepted by only those who think the plea bargain looks attractive (those with low chance of winning at trial), e.g.,

Froeb, Luke, The Adverse Selection of Cases for Trial, International Review of Law and Economics, 13(3), (June, 1993) 317-324