IDEAS home Printed from https://ideas.repec.org/a/sae/jothpo/v3y1991i1p81-101.html
   My bibliography  Save this article

The Effect of Fines on Regulated Industries

Author

Listed:
  • George Tsebelis

Abstract

A series of papers on regulation and fines utilizes formal analysis to conclude that a firm's compliance with regulation increases when the fines for violation are increased. The common denominator of these papers is the modelling of the firm as a decision-maker under risk: the firm's goal is to minimize expected losses given some probability that it may get caught violating certain regulations. A better approach is to derive these probabilities given that the regulatory agency endeavors to maximize its own gains. Therefore, the agency-firm interaction must be modelled explicitly as a game. If such an approach is adopted, the size of the fine or the level of standards has no impact upon the behavior of the firm under a wide range of conditions. On the contrary, an increase in the fine or a lowering of the standards reduces the frequency with which the agency enforces the law.

Suggested Citation

  • George Tsebelis, 1991. "The Effect of Fines on Regulated Industries," Journal of Theoretical Politics, , vol. 3(1), pages 81-101, January.
    • Handle: RePEc:sae:jothpo:v:3:y:1991:i:1:p:81-101
    DOI: 10.1177/0951692891003001006
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0951692891003001006
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0951692891003001006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. David Sappington, 1983. "Optimal Regulation of a Multiproduct Monopoly with Unknown Technological Capabilities," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 453-463, Autumn.
    2. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54, National Bureau of Economic Research, Inc.
    3. Ordeshook,Peter C., 1986. "Game Theory and Political Theory," Cambridge Books, Cambridge University Press, number 9780521315937, September.
    4. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
    5. Ehrenberg, Ronald G & Schumann, Paul L, 1982. "Compliance with the Overtime Pay Provisions of the Fair Labor Standards Act," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 159-181, April.
    6. David P. Baron & David Besanko, 1984. "Regulation, Asymmetric Information, and Auditing," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 447-470, Winter.
    7. Graetz, Michael J & Reinganum, Jennifer F & Wilde, Louis L, 1986. "The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(1), pages 1-32, Spring.
    8. Barry Weingast, 1984. "The congressional-bureaucratic system: a principal agent perspective (with applications to the SEC)," Public Choice, Springer, vol. 44(1), pages 147-191, January.
    9. Friedman, James W. & Rosenthal, Robert W., 1986. "A positive approach to non-cooperative games," Journal of Economic Behavior & Organization, Elsevier, vol. 7(3), pages 235-251, September.
    10. Jennifer F. Reinganum & Louise L. Wilde, 1986. "Settlement, Litigation, and the Allocation of Litigation Costs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 557-566, Winter.
    11. Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-1037, September.
    12. Paul L. Joskow & Roger G. Noll, 1981. "Regulation in Theory and Practice: An Overview," NBER Chapters, in: Studies in Public Regulation, pages 1-78, National Bureau of Economic Research, Inc.
    13. Weitzman, Martin L, 1978. "Optimal Rewards for Economic Regulation," American Economic Review, American Economic Association, vol. 68(4), pages 683-691, September.
    14. Reinganum, Jennifer F & Wilde, Louis L, 1986. "Equilibrium Verification and Reporting Policies in a Model of Tax Compliance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(3), pages 739-760, October.
    15. I.P.L. P'ng, 1983. "Strategic Behavior in Suit, Settlement, and Trial," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 539-550, Autumn.
    16. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
    17. Scholz, John T. & Wei, Feng Heng, 1986. "Regulatory Enforcement in a Federalist System," American Political Science Review, Cambridge University Press, vol. 80(4), pages 1249-1270, December.
    18. Tsebelis, George, 1989. "The Abuse of Probability in Political Analysis: The Robinson Crusoe Fallacy," American Political Science Review, Cambridge University Press, vol. 83(1), pages 77-91, March.
    19. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
    20. Pearce, David G, 1984. "Rationalizable Strategic Behavior and the Problem of Perfection," Econometrica, Econometric Society, vol. 52(4), pages 1029-1050, July.
    21. Downing, Paul B. & Watson, William Jr., 1974. "The economics of enforcing air pollution controls," Journal of Environmental Economics and Management, Elsevier, vol. 1(3), pages 219-236, November.
    22. Bianco, William T. & Ordeshook, Peter C. & Tsebelis, George, 1990. "Crime and Punishment: Are One-Shot, Two-Person Games Enough?," American Political Science Review, Cambridge University Press, vol. 84(2), pages 569-586, June.
    23. Downing, Paul B., 1981. "A political economy model of implementing pollution laws," Journal of Environmental Economics and Management, Elsevier, vol. 8(3), pages 255-271, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alfred Endres & Andreas Lüdeke, 1998. "Limited Liability and Imperfect Information—On the Existence of Safety Equilibria Under Products Liability Law," European Journal of Law and Economics, Springer, vol. 5(2), pages 153-165, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. George Tsebelis, 1990. "Penalty has no Impact on Crime:," Rationality and Society, , vol. 2(3), pages 255-286, July.
    2. Roland Kirstein, 2014. "Doping, the Inspection Game, and Bayesian Enforcement," Journal of Sports Economics, , vol. 15(4), pages 385-409, August.
    3. Jost, Peter-J., 1995. "Disclosure of Information and Incentives for Care," International Review of Law and Economics, Elsevier, vol. 15(1), pages 65-85, January.
    4. Gianfranco Gambarelli & Daniele Gervasio & Francesca Maggioni & Daniel Faccini, 2022. "A Stackelberg game for the Italian tax evasion problem," Computational Management Science, Springer, vol. 19(2), pages 295-307, June.
    5. Kirstein, Roland, 2005. "Bayesian Monitoring," CSLE Discussion Paper Series 2005-06, Saarland University, CSLE - Center for the Study of Law and Economics.
    6. Anna Rita Germani & Pasquale Scaramozzino & Andrea Morone & Piergiuseppe Morone, 2017. "Discretionary enforcement and strategic interactions between enforcement agencies and firms: a theoretical and laboratory investigation," Journal of Regulatory Economics, Springer, vol. 52(3), pages 255-284, December.
    7. Giuseppe Dari-Mattiacci & Bruno Deffains, 2007. "Uncertainty of Law and the Legal Process," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(4), pages 627-656, December.
    8. Jack Hirshleifer & Eric Rasmusen, 1992. "Are Equilibrium Strategies Unaffected by Incentives?," Journal of Theoretical Politics, , vol. 4(3), pages 353-367, July.
    9. Abdul‐Rahman Khokhar & Hesam Shahriari, 2022. "Is the SEC captured? Evidence from political connectedness and SEC enforcement actions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2725-2756, June.
    10. John Bone & Dominic Spengler, 2014. "Does Reporting Decrease Corruption?," Journal of Interdisciplinary Economics, , vol. 26(1-2), pages 161-186, January.
    11. Landeo, Claudia M. & Nikitin, Maxim, 2018. "Financially-constrained lawyers: An economic theory of legal disputes," Games and Economic Behavior, Elsevier, vol. 109(C), pages 625-647.
    12. Marcel Boyer & Tracy R. Lewis & Wei Lin Liu, 2000. "Setting standards for credible compliance and law enforcement," Canadian Journal of Economics, Canadian Economics Association, vol. 33(2), pages 319-340, May.
    13. Andrew F. Daughety & Jennifer F. Reinganum, 1995. "Keeping Society in the Dark: On the Admissibility of Pretrial Negotiations as Evidence in Court," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 203-221, Summer.
    14. Pierre Picard, 2012. "Economic Analysis of Insurance Fraud," Working Papers hal-00725561, HAL.
    15. Orley C. Ashenfelter & David E. Bloom & Gordon B. Dahl, 2013. "Lawyers as Agents of the Devil in a Prisoner's Dilemma Game: Evidence from Long Run Play," NBER Working Papers 18834, National Bureau of Economic Research, Inc.
    16. Dari-Mattiacci, Giuseppe & Deffains, Bruno & Lovat, Bruno, 2011. "The dynamics of the legal system," Journal of Economic Behavior & Organization, Elsevier, vol. 79(1), pages 95-107.
    17. Jeffrey S. Banks, 1992. "Monopoly Pricingand Regulatory Oversight," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 203-233, March.
    18. Heiko Rauhut & Marcel Junker, 2009. "Punishment Deters Crime Because Humans Are Bounded in Their Strategic Decision-Making," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 12(3), pages 1-1.
    19. Haldun Evrenk & E. Zenginobuz, 2010. "Regulation through a revenue contest," Journal of Economics, Springer, vol. 99(3), pages 211-237, April.
    20. Claudia M. Landeo, 2018. "Law and economics and tort litigation institutions: theory and experiments," Chapters, in: Joshua C. Teitelbaum & Kathryn Zeiler (ed.), Research Handbook on Behavioral Law and Economics, chapter 9, pages 247-268, Edward Elgar Publishing.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:jothpo:v:3:y:1991:i:1:p:81-101. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.