Announced or Surprise Inspections and Oligopoly Competition

Emmanuel Dechenaux and Samuel Andrew ()
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Samuel Andrew: Department of Economics, Loyola University Maryland, 4501 N. Charles Street, Baltimore, MD 21210, USA

The B.E. Journal of Economic Analysis & Policy, 2019, vol. 19, issue 1, 20

Abstract: To enforce compliance, regulators often choose between announced or unannounced (surprise) inspections. We analyze the impact of these inspection regimes on firms’ compliance choices in a multiple stage oligopoly game of quantity competition with endogenous compliance, monitoring and avoidance. In equilibrium, whether unannounced inspections achieve a higher level of compliance than announced inspections depends on the number of firms, demand and the cost of compliance. Furthermore, the impact on compliance of increasing the fine, the supervisor’s wage or the probability of inspections also depends on market size and structure and may be non-monotonic. Finally we provide conditions under which a welfare maximizing regulator will prefer an unannounced to an announced regime. Thus, our results suggest that when choosing the appropriate inspection regime, regulators should account for market characteristics, especially if compliance maximization is the objective.

Keywords: detection avoidance; compliance; oligopoly; unannounced inspections; announced inspections (search for similar items in EconPapers)
JEL-codes: K42 L13 L15 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/bejeap-2018-0141

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