Compliance with Corporate Policy: An Economic Approach

Abstract

We consider how corporations respond to public policy mandates with internal compliance policies and enforcement. We suppose that corporate compliance is determined by employees of the firm, whose incentives do not align perfectly with those of the corporation. In response, corporations expend resources to make compliance more likely. They adopt internal compliance policies and enforce these policies by sanctioning employees that violate them. Perfect compliance is unlikely, given imperfect observability of employee behavior. We present a number of laws and regulations with which firms may choose to comply, construct a model of internal compliance, and close with a discussion of different internal compliance policies and their feasibility. Copyright © 2013 John Wiley & Sons, Ltd.

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