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Optimal regulation under imperfect enforcement: Permits, tickets, or both?
Author(s) -
Samuel Andrew,
Farmer Amy,
Mendez Fabio
Publication year - 2020
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12242
Subject(s) - imperfect , enforcement , language change , action (physics) , economics , welfare , perfect information , microeconomics , information asymmetry , public economics , market economy , law , political science , philosophy , linguistics , art , physics , literature , quantum mechanics
Economic activity is often regulated through both permits and tickets (subsequent inspections). We study the effectiveness of such policies where corruption and an underground economy make enforcement imperfect. In the theoretical model, asymmetric information justifies regulatory action which is enforced by corruptible bureaucrats. We find that regulation through permits alone is useless when corruption exists, while tickets still offer some benefit. Surprisingly, we also find that a system with both permits and tickets achieves welfare that is higher than that which can be achieved with only tickets—that combining the two mechanisms has an effect that is greater than the “sum of the parts.”