An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement

15 Pages Posted: 5 Jun 2006

See all articles by Timothy N. Cason

Timothy N. Cason

Purdue University - Krannert School of Management

Lata Gangadharan

University of Melbourne - Department of Economics

Abstract

Evidence suggests that individuals often comply with regulations even though the frequency of inspections and audits is low. We report a laboratory experiment based on the dynamic model suggested by Harrington (1988) to explain this puzzle in which participants move between two inspection groups that differ in the probability of inspection and severity of fine. Enforcement leverage arises in the Harrington model from movement between the groups based on previous observed compliance and noncompliance. We find that compliance behavior does not change as sharply as the model predicts. A simple model of bounded rationality explains these deviations from optimal behavior.

JEL Classification: C91, Q20, Q28

Suggested Citation

Cason, Timothy N. and Gangadharan, Lata, An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement. Economic Inquiry, Vol. 44, No. 2, pp. 352-366, 2006. Available at SSRN: https://ssrn.com/abstract=906382

Timothy N. Cason (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
765-494-1737 (Phone)

Lata Gangadharan

University of Melbourne - Department of Economics ( email )

Victoria, 3010
Australia
+61 3 9344 5408 (Phone)
61 3 8344 6899 (Fax)

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