The Compliance Consequences of Fault Assignment in Sanctions

Abstract

Regulators rely heavily on ‘no-fault’ settlements in their enforcement, where targets avoid costly litigation by accepting sanctions without admitting or denying fault. Considerable public debate surrounds the issue but prior research has typically focused on financial dimensions of sanctions such as the magnitude of fines. I conduct an economic experiment where individuals face a costly compliance choice in the presence of sanctions that may either be greater than or less than the benefits of violating, and may also require admission of fault. I observe that compliance is less dependent on the magnitude of fines when fault is assigned in enforcement. I also observe that fault-based compliance is of higher quality. In supplemental analysis, I confirm that participants respond to fault incrementally to economic dimensions of sanctions and observe that participants incorrectly expect that sanction strength, rather than sanction magnitude, will foster greater compliance quality.