An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement
Timothy Cason and
Lata Gangadharan ()
No 918, Department of Economics - Working Papers Series from The University of Melbourne
Abstract:
Evidence suggests that a large majority of firms and individuals comply with regulations and tax laws even though the frequency of inspections and audits is often low. Moreover, fines for noncompliance are also typically low when regulatory violations are discovered. These observations are not consistent with static compliance models. Harrington (1988) modified these static models by specifying a dynamic game in which some agents have an incentive to comply even when the cost of compliance each period is greater than the expected penalty. This paper reports a laboratory experiment based on the Harrington model framework, in which subjects move between two inspection groups that differ in the probability of inspection and severity of fine. Subjects decide to comply or not in the presence of low, medium or high compliance costs. Enforcement leverage arises in the Harrington model from movement between the inspection groups based on previous observed compliance and noncompliance. Our results indicate that consistent with the model, violation rates increase when compliance costs become higher and as the probability of switching groups becomes lower. Behavior does not change as sharply as the model predicts, however, since violation rates do not jump from 0 to 1 as parameters vary across critical thresholds. A simple model of bounded rationality explains these deviations from optimal behavior.
Keywords: Regulatory Compliance; Laboratory Experiments; Tax. (search for similar items in EconPapers)
JEL-codes: C91 Q20 Q28 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
http://www.economics.unimelb.edu.au/downloads/wpapers-04/918.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.economics.unimelb.edu.au/downloads/wpapers-04/918.pdf [301 Moved Permanently]--> http://fbe.unimelb.edu.au/economics/downloads/wpapers-04/918.pdf [301 Moved Permanently]--> https://fbe.unimelb.edu.au/economics/downloads/wpapers-04/918.pdf)
Related works:
Journal Article: An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement (2006) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:918
Access Statistics for this paper
More papers in Department of Economics - Working Papers Series from The University of Melbourne Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Dandapani Lokanathan ().