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Enforcement, Regulation and Development

  • Jean-Jacques Laffont

After discussing examples of enforcement failures for regulatory contracts in Africa, we develop a regulation model with asymmetric information and imperfect enforcement. Either the regulator succeeds in forcing the regulated firm to fulfill the contract or renegotiation takes place. The probability of renegotiation decreases with the level of enforcement expenditures which is chosen by the regulator. The model suggests that the endogenous level of enforcement decreases with the proneness to corruption, and increases and then decreases with the level of development. Finally, we document this relationship empirically. Copyright 2003, Oxford University Press.

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Article provided by Centre for the Study of African Economies (CSAE) in its journal Journal of African Economies.

Volume (Year): 12 (2003)
Issue (Month): Supplement 2 (September)
Pages: 193-211

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Handle: RePEc:oup:jafrec:v:12:y:2003:i:supp2:p:193-211
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  1. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 525-40, October.
  2. Cremer, H. & Marchand, M. & Pestieau, P., 1990. "Evading, auditing and taxing : The equity-compliance tradeoff," Journal of Public Economics, Elsevier, vol. 43(1), pages 67-92, October.
  3. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  4. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  5. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  6. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, June.
  7. George J. Stigler, 1974. "The Optimum Enforcement of Laws," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 55-67 National Bureau of Economic Research, Inc.
  8. Khalil, F., 1992. "Auditing Without Commitment," Working Papers 92-15, University of Washington, Department of Economics.
  9. Friedrich Schneider & Dominik Enste, 2000. "Shadow Economies Around the World; Size, Causes, and Consequences," IMF Working Papers 00/26, International Monetary Fund.
  10. Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
  11. Mookherjee, Dilip & Png, Ivan, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 399-415, May.
  12. Khalil, F., 1992. "Auditing Without Commitment," Discussion Papers in Economics at the University of Washington 92-15, Department of Economics at the University of Washington.
  13. David P. Baron & David Besanko, 1984. "Regulation, Asymmetric Information, and Auditing," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 447-470, Winter.
  14. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
  15. Janusz Ordover & Russell Pittman & Paul Clyde, 2001. "Competition Policy for Natural Monopolies in a Developing Market Economy," Industrial Organization 0111004, EconWPA.
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