Using competition to stimulate regulatory compliance: A tournament-based dynamic targeting mechanism

This article develops a tournament-based dynamic targeting mechanism for achieving regulatory enforcement leverage. In contrast to existing models which rely on a representative agent, we model a game among a regulated group of agents, possibly heterogeneous in their levels of a regulated activity, that compete through their compliance decisions to avoid being targeted for future audits. The empirical properties of the dynamic tournament are established using economics experiments. In particular, we test comparative statics, highlight the importance of inducing competition through comparisons with a (non-competitive) standards-based targeting mechanism, and demonstrate enforcement leverage through comparisons with simple random audits. The experiments suggest that the dynamic tournament induces incentives consistent with theory, and overall we find that (introducing) competition in the regulatory enforcement arena may have important advantages.