The effect of transparent unequal penalty rates on safety compliance for different-sized businesses

Abstract

Abstract The present study investigates the relation of procedural transparency and compliance with authorities’ regulations. The underlying assumption is that procedural transparency encourages compliance with regulations. In an incentivized experiment, 666 participants took on the role of a business owner and had to fill in a form and spend a certain amount of their income as compliance costs to adhere to safety rules. In a 2 (Business Size: small vs big) × 2 (Penalty Rate: equal vs unequal) × 2 (Penalty Scheme: transparent vs nontransparent) between-subjects design, we investigated whether an unequal penalty rate for small-size in contrast to big-size businesses had a different effect on compliance when this difference was transparent compared to when it was not transparent. Business income, compliance costs, and audit probability were varied within-subject, over 18 decision rounds. We find that the deterring effect of a higher penalty rate for big-size compared to small-size businesses under a nontransparent unequal penalty scheme is attenuated when the same information is available. This supports the idea of a backfiring effect and suggests that authorities need to carefully consider what information about their procedures to communicate in order to avoid the unintended negative effects of increasing transparency.