Regulatory Capacity in a Game of Asymmetric Regulation

In a model of asymmetric regulation, a firm can comply with two regulatory targets, and a regulator can audit the firm for compliance. Inspection by the regulator is imperfect, and it assesses the firm’s compliance with the targets with different success probabilities. The firm fully complies only if compliance costs are low. Otherwise, the firm always prioritizes the requirement that is easier to enforce. Expanding regulatory capacity positively affects compliance with the easy-to-enforce target; however, a higher capacity can harm compliance with the hard-to-enforce target.

Gambato, Jacopo, Bernhard Ganglmair and Julia Krämer (2025), Regulatory Capacity in a Game of Asymmetric Regulation, ZEW Discussion Paper No. 25-050, Mannheim.