Firm Compliance With Social Insurance Obligations Where There is a Weak Surveillance and Enforcement Mechanism: Empirical Evidence from Shanghai

This paper draws on a unique data set collected in audits in 2001 and 2002 by the Bureau of Labour and Social Security in Shanghai to examine why firms in Shanghai comply or over-comply with social insurance obligations in a regulatory environment where the expected punishment for non-compliance is low. Drawing on Harrington (1988), we test two hypotheses. The first hypothesis is that based on the first audit, the BOLSS will segment firms into low (non-aggressive) and high (aggressive) categories and those in the high category will be more likely to be re-audited. The second hypothesis is that if the identified non-complier is re-audited, it will be more likely to comply with its social insurance obligations in order to be returned from the high (aggressive) category into the low (non aggressive) category. Our first main finding is that firms found to be in non-compliance in the first audit in 2001 were moved into a separate violation category and the probability of being reaudited in 2002 was significantly higher if the firm was in that category. Our second main result is that across the board, firms which were reaudited continued to underpay in 2002 but the extent of underpayment was significantly reduced.