Asymmetric Information Models of Law Enforcement and Regulatory Compliance

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Economic considerations have an important influence on the outcomes of two-party bargaining situations which are subject to enforcement by law. Drs. Reiganum and Wilde seek to extend their earlier work under NSF support, which focused on the conditions that engender income tax compliance, to a variety of problems involving bargaining situations in the areas of tax compliance, plea bargaining, and regulatory compliance. They make a series of different assumptions concerning human behavior and then examine and compare the outcomes of the situations which follow from these different assumptions as well as the degree to which these outcomes can be predicted. The models they formulate to study these problems use analytic techniques from economic theory and the theory of incomplete information. The research of Drs. Reiganum and Wilde addresses several fundamental questions regarding compliance in the face of asymmetric information: To what extent does prosecutorial discretion affect bargaining between prosecutors (as agents of society) and defendants over reduced sentences in exchange for guilty pleas? How does uncertainty on the part of taxpayers affect their compliance behavior, and how does the incorporation of third-party "expert advisors" affect compliance and Internal Revenue Service auditing? How does a firm undertaking toxicity testing decide whether or not to apply to the Environmental Protection Agency (EPA) for permission to manufacture the new chemical and how, in turn, does the EPA choose to accept the firm's application or, alternatively, to conduct a costly audit of the firm's test results? The rigorous theoretical analysis of Drs. Reiganum and Wilde promises to further illuminate the causes and underlying dynamics of compliance and thus is of substantial scientific significance.