Misreporting and Regulatory Incentives

Abstract

I study how regulators' self-interest affects the transparency of their enforcement regimes and, as a result, misreporting by overseen firms. I use the revolving door from government to the private sector as a natural, commonly-occurring setting that captures self-interest. In this setting I construct a model in which the regulator's desire to revolve or not, as well as the intensity of regulatory enforcement, is private information that the regulator can voluntarily disclose. Uncertainty about the regulator's incentives and regulatory intensity yields a nontrivial partial disclosure equilibrium in which, despite the presence of the revolving door, selective disclosure can lead to lower levels of misreporting. The model provides a lens through which to understand recent empirical work on how regulators with private-sector ambitions behave, and suggests avenues for future empirical research.