The Compliance Trap: The Moral Message in Responsive Regulatory Enforcement

Abstract:     
Deterrence will often fail because it falls into the 'deterrence trap' - penalties are either not large enough or so large they exceed the capacity to pay. Responsive regulation, by contrast, builds commitment to compliance through moral suasion backed up by tough enforcement action. Empirical evidence on the impact of the Australian Competition and Consumer Commission's cartel enforcement activity shows that in overcoming the deterrence trap, responsive regulators can fall into 'compliance trap.'

The 'compliance trap' occurs where there is a lack of political and cultural support for the moral seriousness of the law it must enforce, such as is the case with much of the law relating to business regulation. The regulator can choose to nevertheless take enforcement action in a way that garners compliance by communicating the moral seriousness of breaches of the law. If they do so, however, their enforcement action will ultimately lack legitimacy in the eyes of business regulatees. Most regulators most of the time will end up taking the easy option of enforcing the law 'softly' or formalistically, and therefore ineffectively.

Keywords: compliance, deterrence, regulation, law

JEL Classifications: K00, K23

Accepted Paper Series