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Learning about compliance under asymmetric information

  • Arguedas, Carmen

    ()

    (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)

  • Rousseau, Sandra

    ()

    (Center of Economic Studies, K.U.Leuven, Naamsestraat 69, B-3000 Leuven, Belgium,)

Over time, inspection agencies gather information about firms that cause harmful externalities. This information may allow agencies to differentiate their monitoring strategies in the future, since inspections can be influenced by firms’ past performance relative to other competitors in the market. If a firm is less successful than its peers in reducing the externality, it faces the risk of being targeted for increased inspections in the next period. This risk of stricter monitoring might induce high cost firms to mimic low cost firms, while the latter might try to avoid being mimicked. We show that under certain circumstances, mimicking, or even the threat of mimicking, might reduce socially harmful activities and thus be welfare improving.

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Paper provided by Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History) in its series Working Papers in Economic Theory with number 2008/02.

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Length: 36 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:uam:wpaper:200802
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