Publications
Publications
- 2023
Much Ado About Nothing? Overreaction to Random Regulatory Audits
By: Samuel Antill and Joseph Kalmenovitz
Abstract
Regulators often audit firms to detect non-compliance. Exploiting a natural experiment in the lobbying industry, we show that firms overreact to audits and this response distorts prices and reduces welfare. Each year, federal regulators audit a random sample of firm-client pairs. Following an audit, we find that audited clients are more likely to retain the audited lobbying firm, and they pay a lower price for the same amount of services. Estimating a dynamic structural model with our natural experiment, we show that this pattern is driven by overreaction: clients are almost indifferent to audits, but lobbying firms mistakenly believe their clients view audits as extremely negative events. Therefore, lobbyists offer unnecessary price discounts to retain audited clients. In a counterfactual world with no overreaction, we estimate that price corrections and better client-firm matching quality would increase welfare by 6.4%. Our results are the first to document an unintended effect of regulation on prices and matching, as regulated entities overreact to regulatory actions.
Keywords
Citation
Antill, Samuel, and Joseph Kalmenovitz. "Much Ado About Nothing? Overreaction to Random Regulatory Audits." Working Paper, August 2023.