Corporate Governance and the Risk-Regulation Game: A Game-Theoretic Analysis of Risk Regulation

Abstract

The question posed in the title of this paper is perhaps the single-most important question in law. But what drives the decision to comply with or evade the law? For example, why do some people pay their taxes, while others evade them? Although there are a few notable exceptions, many scholars have neglected the question of compliance versus evasion, simply assuming that laws will be complied with. In this paper, however, we shall not take compliance with law for granted. Instead, following in the footsteps of Gary S. Becker and others, we shall explore this critical question -- evade or comply? -- through a variety of simple, formal models. Our paper is thus organized as follows. First, in part one, we present a simple two-state Markov model of law abiding and law evading behavior. Next, in part two, we present a simple contagion model of evasion and compliance. Part three then presents an interactive or game-theoretic model of the decision to evade or comply. Part four explores some possible practical applications of our models, while part five concludes.