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  • 2023
  • Working Paper

Much Ado About Nothing? Overreaction to Random Regulatory Audits

By: Samuel Antill and Joseph Kalmenovitz
  • Format:Electronic
  • | Language:English
  • | Pages:59
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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

Governance Compliance; Governing Rules, Regulations, and Reforms; Price

Citation

Antill, Samuel, and Joseph Kalmenovitz. "Much Ado About Nothing? Overreaction to Random Regulatory Audits." Working Paper, August 2023.
  • SSRN

About The Author

Samuel B. Antill

Finance
→More Publications

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More from the Authors
  • First Citizens’ Acquisition of SVB By: Samuel Antill, Marco Sammon and Erik Stafford
  • Crisis Interventions in Corporate Insolvency By: Samuel Antill and Christopher Clayton
  • The Real Effects of Bankruptcy Forum Shopping By: Samuel Antill and Aymeric Bellon
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