The regulator/regulatee relationship is strongly influenced by information asymmetries. Regulators need to estimate the quality of regulated firms based on limited information in order to target their investigations at the firms with the lowest compliance. To avoid the costs of an investigation and possible corrective actions, regulated firms try to signal to the regulator that they are of high quality and do not need to be investigated. This paper argues that for a signal to be credible it needs to be relevant, verifiable, costly and extra costly for low quality firms (able to discriminate). The first three conditions do not enable a regulator to distinguish high from low quality firms, as a low compliance firm is just as able as a high compliance firm to create and send these signals. Only the inclusion of the fourth condition, being discriminatory, enables the regulator to correctly target low quality firms.
These Occasional Papers are jointly published by ANZSOG and the (former) Victorian State Services Authority.
van Beusekom, H. (2011). Improving Public Value in Regulatory Enforcement: Credible signalling in regulatory relationships. SSA/ANZSOG Occasional Paper, 13. Melbourne: ANZSOG.