The Relation between Information and Compliance

How does more information impact on demand for compliance

Objectives and Structure of the Presentation

Objective• Put “Compliance” and “Information” into

perspective to make inference on how more information can impact on demand for compliance by taking the viewpoint of the legal/regulatory system

Compliance and the Legal System

Compliance• a state of being in accordance with established

guidelines, specifications;

Or,

• legislation or the process of becoming so.

In the legal system, compliance usually refers to behavior in accordance with legislation

Businesses and Compliance

• In a regulatory context, compliance is a prevalent business concern, perhaps because of an ever-increasing number of regulations and a fairly widespread lack of understanding about what is required for a company to be in compliance with new legislation

Information

• As Stigler (1961) put it: “One should hardly have to tell academicians that information is a valuable resource: knowledge is power.”

• This power is sometimes ignored. Quite often, common people think they know the “law”, the “market price”, etc. But, ignorance in the market place leads to “price” dispersion.

• While this “neglect of ignorance is no doubt permissible, or even desirable”, it can be an issue of serious concern in some social and economic forms of organization, especially in the perspective of “search for information”.

George J. Stigler, 1961

Information as a Good/Commodity

• As a good (private or public), information carries a “non homogenous” price.

• “Dispersion” is a biased measure of ignorance because there is never absolute homogeneity in the “commodity”

Information Search/Cost

• Prices change frequently in all markets and hence no one will know all the prices

• Searching for information is costly (money and time: the opportunity cost), which will not be equal for all “consumers/buyers”

• One solution is to have a market which is completely centralized (problematic? Yes, but best solution in a second best world: nature of public good)

Information and Compliance

• Compliance requires knowledge of the regulation• Knowledge entails the existence of information• Compliance, however, binds all individuals

equally and hence they should all be treated equally before the law

• Laws have often been shown to be complex to interpret even for the scholars in the legal system

• This complexity, and the cost that comes with it, requires that more information is provided

Information and Compliance

• How does information impact on compliance?• Voluntary compliance reduces regulators costs (principal

and agent problem – e.g. efficient wage theory)• More information reduces money and time costs

associated with information search• The public nature of the commodity (information) induces

economies of scale and reduces dispersion (or, leads to homogeneity = symmetric information)

• Regulatory information (i.e. law) has the advantage of not becoming obsolete at the same rate of market commodities because it does not change constantly.

Reason for Compliance

• However, “the assimilation of information is not an easy of pleasant task for some people”

• More information per se will not bring about compliance

• The information must be “enjoyable”, meaning users must comprehend and adhere/embrace the true meaning/purpose/content/

• In other words, the information(i.e. regulation) must have some sort of in-built incentives to induce purposely voluntary compliance