Monitoring: The Behavioral Economics of Inducing Agents' Compliance with Legal Rules

Abstract:     
One of the many places where firms confront the difficulty of monitoring their agents is with respect to legal compliance. A firm wants its agents to be sensitive to legal requirements in order to minimize the threat of legal sanction and reputational harm that it faces when a violation occurs. For a variety of reasons, however, agents have a different set of compliance incentives. Recent years have brought an abundance of scholarly and practical literature on the task of organizational compliance. Firms are under increasing pressure to engage in aggressive "command and control"-style monitoring, which in turn raises questions about the net pay-offs from these efforts. Some critics say that greater attention to social institutions such as norms, culture and trust would actually produce better incentive compatibility, and higher rates of compliance, than high-pressure supervision. Thus, scores of articles advocate a more ethics or "integrity"-based effort at building compliance cultures within firms. But this remains a contested field, and diligent monitoring is still the baseline for most compliance initiatives.

My specific interest in this paper is in what work in social and cognitive psychology - the stuff of contemporary behavioral law and economics - has to say about the task of compliance and this contest between hard and soft monitoring strategies. To be sure, the psychological work touching on this subject is tentative, often contestable, and always highly context-dependent, making it difficult to articulate strong, confident predictions about behavior in this setting. My aim, however, is slightly less ambitious. Most of the legal discourse on supervision and compliance today makes behavioral predictions while ignoring this body of research entirely. I am content to think about what normative conclusions might follow if it turns out that these psychological predictions are robust within firms.

Working Paper Series