Abstract
This article develops a simple model of a firm's privately optimal choice of the degree to which it will abide with regulations. The model allows for the firm to disguise its illegal actions in order to avoid detection and to expend resources to mitigate possible punishment for violations. Both price and quantity type regulatory schemes are considered. Under quantity regulation noncompliance increases the total amount of the regulated activity and distorts efficiency in production. Price regulation, on the other hand, introduces a kind of dichotomy between the real production plan of the firm and its illegal activity. Even though price regulations are substantially evaded, the total amount of the regulated activity remains unchanged, and the firm continues to produce efficiently.
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