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An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement

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Author Info
Timothy N. Cason
Lata Gangadharan

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Abstract

Evidence suggests that individuals often comply with regulations even though the frequency of inspections and audits is low. We report a laboratory experiment based on the dynamic model suggested by Harrington (1988) to explain this puzzle in which participants move between two inspection groups that differ in the probability of inspection and severity of fine. Enforcement leverage arises in the Harrington model from movement between the groups based on previous observed compliance and noncompliance. We find that compliance behavior does not change as sharply as the model predicts. A simple model of bounded rationality explains these deviations from optimal behavior. (JEL C91, Q20, Q28) Copyright 2006, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/ei/cbj019
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Publisher Info
Article provided by Oxford University Press in its journal Economic Inquiry.

Volume (Year): 44 (2006)
Issue (Month): 2 (April)
Pages: 352-366
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Handle: RePEc:oup:ecinqu:v:44:y:2006:i:2:p:352-366

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General
Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Linder, Stephen H. & McBride, Mark E., 1984. "Enforcement costs and regulatory reform: The agency and firm response," Journal of Environmental Economics and Management, Elsevier, vol. 11(4), pages 327-346, December. [Downloadable!] (restricted)
  2. Salop, Steven C & Scheffman, David T, 1983. "Raising Rivals' Costs," American Economic Review, American Economic Association, vol. 73(2), pages 267-71, May. [Downloadable!] (restricted)
  3. Landsberger, Michael & Meilijson, Isaac, 1982. "Incentive generating state dependent penalty system : The case of income tax evasion," Journal of Public Economics, Elsevier, vol. 19(3), pages 333-352, December. [Downloadable!] (restricted)
  4. Timothy N. Cason & Lata Gangadharan, 2004. "Emissions Variability in Tradable Permit Markets with Imperfect Enforcement and Banking," Department of Economics - Working Papers Series 917, The University of Melbourne. [Downloadable!]
    Other versions:
  5. Philip A. Haile & Ali Hortacsu & Grigory Kosenok, 2003. "On the Empirical Content of Quantal Response Equilibrium," Levine's Bibliography 666156000000000215, UCLA Department of Economics. [Downloadable!]
    Other versions:
  6. Torgler, Benno, 2002. " Speaking to Theorists and Searching for Facts: Tax Morale and Tax Compliance in Experiments," Journal of Economic Surveys, Blackwell Publishing, vol. 16(5), pages 657-83, December. [Downloadable!] (restricted)
  7. Alm, James & Jackson, Betty & McKee, Michael, 1992. "Institutional Uncertainty and Taxpayer Compliance," American Economic Review, American Economic Association, vol. 82(4), pages 1018-26, September. [Downloadable!] (restricted)
  8. Jeremy Clark & Lana Friesen & Andrew Muller, 2004. "The Good, the Bad, and the Regulator: An Experimental Test of Two Conditional Audit Schemes," Economic Inquiry, Oxford University Press, vol. 42(1), pages 69-87, January. [Downloadable!] (restricted)
  9. James Alm & Michael McKee, 1998. "Extending the lessons of laboratory experiments on tax compliance to managerial and decision economics," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 19(4-5), pages 259-275.
  10. Richard Mckelvey & Thomas Palfrey, 1998. "Quantal Response Equilibria for Extensive Form Games," Experimental Economics, Springer, vol. 1(1), pages 9-41, June. [Downloadable!] (restricted)
  11. Friesen, Lana, 2003. "Targeting enforcement to improve compliance with environmental regulations," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 72-85, July. [Downloadable!] (restricted)
  12. Storey, D J & McCabe, P J, 1980. "The Criminal Waste Discharger," Scottish Journal of Political Economy, Scottish Economic Society, vol. 27(1), pages 30-40, February.
  13. Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October. [Downloadable!] (restricted)
  14. Alm, James & Cronshaw, Mark B & McKee, Michael, 1993. "Tax Compliance with Endogenous Audit Selection Rules," Kyklos, Blackwell Publishing, vol. 46(1), pages 27-45.
  15. Oljaca, Neda & Keeler, Andrew G & Dorfman, Jeffrey, 1998. "Penalty Functions for Environmental Violations: Evidence from Water Quality Enforcement," Journal of Regulatory Economics, Springer, vol. 14(3), pages 255-64, November. [Downloadable!] (restricted)
  16. Eckert, Heather, 2004. "Inspections, warnings, and compliance: the case of petroleum storage regulation," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 232-259, March. [Downloadable!] (restricted)
  17. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Timothy N. Cason & Lata Gangadharan, 2004. "Emissions Variability in Tradable Permit Markets with Imperfect Enforcement and Banking," Department of Economics - Working Papers Series 917, The University of Melbourne. [Downloadable!]
    Other versions:
  2. Bigoni, Maria & Le Coq, Chloé & Fridolfsson, Sven-Olof & Spagnolo, Giancarlo, 2008. "Risk Aversion, Prospect Theory, and Strategic Risk in Law Enforcement: Evidence From an Antitrust Experiment," Working Paper Series in Economics and Finance 696, Stockholm School of Economics. [Downloadable!]
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