ANTICIPATORY COMPLIANCE AND EFFECTIVE REGULATORY ACTIVITY

A number of case studies document the coexistence of significantly hig h levels of compliance with low inspection frequencies. The present pa per provides an explanation of this puzzle by analyzing a sequential g ame where the enforcement activity is predicated on the (observable) l evel of violations, and the agents anticipate the effect of their comp liance decisions on the regulator. Such anticipatory behavior is shown to result in higher levels of compliance at lower monitoring frequenc ies compared to the equilibrium outcome of the corresponding simultane ous move game.