Compliance-based theory of regulation

This article proposes an approach to developing a general theory of compliance-based regulation as a more advanced version of Becker’s deterrence model. In its simple form, this model is inadequate for complex organizations and boundedly rational actors. The article aims to establish the need to develop such a theory and formulate its core principles using contract theory and behavioral economics. It also proposes an agenda for further theoretical and empirical research based on these principles. We begin by examining Becker’s simple deterrence model and demonstrating its limitations. We then outline the general idea of a theory of compliance-based regulation involving three levels of actors—the regulator, the firm, and employees. At each level, the central task is to create effective incentives for compliant behavior. The key instrument is the quality of the compliance system implemented by the firm. Next, we propose a basic formal model grounded in economic contract theory and show that concepts from behavioral economics can usefully complement it. Finally, the article briefly reviews the development of related concepts in the international literature and presents examples of compliance-based regulation in different countries. It concludes by outlining an agenda for further theoretical and empirical research.