Lobbying and Enforcement: Theory and Application to Bank Regulation

We suggest a novel explanation for lobbying in the context of enforcement. Offenders may lobby to communicate some private information, which may allow enforcement agents to focus their enforcement effort on investigating those individuals whose offending would be particularly harmful for society. Our model shows that, if the enforcement agent’s objective is to maximise social welfare, the availability of lobbying can never reduce welfare in equilibrium. In the special case of the social value of an offense being aligned with the offender’s private benefit, it will be the least socially harmful potential offenders who escape investigation and punishment because of lobbying, whereas a medium range of types will commit the offense but not lobby. However, if enforcement is delegated to a self-interested agent, lobbying may reduce welfare, as the enforcement agent induces the ’wrong’, intermediate types of offenders to lobby whereas the least harmful types of offenders commit an offense without lobbying. We briefly discuss applying the model to bank regulation and show that evidence from regulatory enforcement actions against banks in the US is in line with the first of these model versions."