Announced vs. Surprise Inspections with Tipping-Off

34 Pages Posted: 13 Dec 2012 Last revised: 26 Feb 2016

See all articles by Emmanuel Dechenaux

Emmanuel Dechenaux

Kent State University - Department of Economics

Andrew Samuel

Loyola University Maryland

Date Written: December 30, 2013

Abstract

This paper analyzes a model in which a firm's compliance with regulation is monitored by a supervisor. The supervisor exerts costly, unobservable effort to raise his inspection intensity, which leads to moral hazard. A non-compliant firm may exert effort in avoidance to reduce the probability of sanction. The regulatory framework is such that inspections may be announced or unannounced. Our analysis derives novel results about the response of monitoring and avoidance to changes in inspection policies, as well as conditions under which a regulator who maximizes compliance prefers unannounced to announced inspections. When the supervisor is corruptible, unannounced inspections are susceptible to a tip-off from the supervisor to the firm in exchange for a bribe. To eliminate bribery, the regulator may reduce the frequency of inspections. However, in an example, we show that eliminating tipping-off may lead to lower compliance unless the supervisor's wage is raised.

Keywords: Regulation, Compliance, Unannounced inspections, Tip-off, Corruption

JEL Classification: D21, D82, K42

Suggested Citation

Dechenaux, Emmanuel and Samuel, Andrew, Announced vs. Surprise Inspections with Tipping-Off (December 30, 2013). Available at SSRN: https://ssrn.com/abstract=2188731 or http://dx.doi.org/10.2139/ssrn.2188731

Emmanuel Dechenaux (Contact Author)

Kent State University - Department of Economics ( email )

Kent, OH 44242
United States

Andrew Samuel

Loyola University Maryland ( email )

4501 North Charles Street
Baltimore, MD 21210-2699
United States

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