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The Effect of Fines on Regulated Industries

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  • George Tsebelis

Abstract

A series of papers on regulation and fines utilizes formal analysis to conclude that a firm's compliance with regulation increases when the fines for violation are increased. The common denominator of these papers is the modelling of the firm as a decision-maker under risk: the firm's goal is to minimize expected losses given some probability that it may get caught violating certain regulations. A better approach is to derive these probabilities given that the regulatory agency endeavors to maximize its own gains. Therefore, the agency-firm interaction must be modelled explicitly as a game. If such an approach is adopted, the size of the fine or the level of standards has no impact upon the behavior of the firm under a wide range of conditions. On the contrary, an increase in the fine or a lowering of the standards reduces the frequency with which the agency enforces the law.

Suggested Citation

  • George Tsebelis, 1991. "The Effect of Fines on Regulated Industries," Journal of Theoretical Politics, , vol. 3(1), pages 81-101, January.
    • Handle: RePEc:sae:jothpo:v:3:y:1991:i:1:p:81-101
    DOI: 10.1177/0951692891003001006
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    References listed on IDEAS

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    1. Graetz, Michael J & Reinganum, Jennifer F & Wilde, Louis L, 1986. "The Tax Compliance Game: Toward an Interactive Theory of Law Enforcement," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 2(1), pages 1-32, Spring.
    2. Paul L. Joskow & Roger G. Noll, 1981. "Regulation in Theory and Practice: An Overview," NBER Chapters, in: Studies in Public Regulation, pages 1-78, National Bureau of Economic Research, Inc.
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    5. 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.
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    19. Loeb, Martin & Magat, Wesley A, 1979. "A Decentralized Method for Utility Regulation," Journal of Law and Economics, University of Chicago Press, vol. 22(2), pages 399-404, October.
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    Cited by:

    1. Alfred Endres & Andreas Lüdeke, 1998. "Limited Liability and Imperfect Information—On the Existence of Safety Equilibria Under Products Liability Law," European Journal of Law and Economics, Springer, vol. 5(2), pages 153-165, March.

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