An Experimental Study of Compliance and Leverage in Auditing and Regulatory Enforcement

Evidence suggests that individuals often comply with regulations even though the frequency of inspections and audits is low. We report a laboratory experiment based on the dynamic model suggested by Harrington (1988) to explain this puzzle in which participants move between two inspection groups that differ in the probability of inspection and severity of fine. Enforcement leverage arises in the Harrington model from movement between the groups based on previous observed compliance and noncompliance. We find that compliance behavior does not change as sharply as the model predicts. A simple model of bounded rationality explains these deviations from optimal behavior. (JEL C91, Q20, Q28) Copyright 2006, Oxford University Press.