The 'True and Full' Opportunity Costs Of Non-Compliance For Regulated Entities

The scathing report of the American Congress in September 2020 on the Boeing 737 Max crashes and regulatory fiasco underlines the risks and dangers that result from governments and their regulatory authorities, regulated entities, the academic community and the media focusing solely on the business costs of regulatory compliance – while ignoring the costs of regulatory non-compliance for firms, the national economy and society. The purpose of the author’s research program and this working paper is to bring a behavioral economics lens to identifying the true and full opportunity costs of non-compliance by corporations and other regulated entities.

The paper argues that the conventional economics, and law and economics, approaches badly underestimate the net economic and social benefits from compliance and the true and full opportunity costs of non-compliance with laws, regulations and social norms. These more conventional approaches do not meet the interests and requirements of: governments and their regulatory authorities, civil society groups, potential and actual victims, and the overall society and national economy. Most importantly, this narrow benefit-cost approach and related metrics fall far short of satisfying the longer term regulatory requirements of regulated entities and their senior executives, managers, and employees, their compliance and corporate social responsibility advisors and divisions, and their supply chain and other business partners.

The working paper employs recent advances in the social psychology, behavioral economics, behavioral ethics, neuroscience, behavioral benefit-cost, and related less conventional economics literatures in order to identify twenty quite diverse but still interrelated sources and drivers of the true and full opportunity costs of non-compliance. These behaviorally informed sources and drivers are divided into three categories: (i) bounded rationality, cognitive scarcity, cognitive misers, and other system 1 attributes of the human brain; (ii) the financial, economic and social costs incurred and generated by non-compliant regulated entities; and, (iii) transaction, relationship and networking costs and related negative externalities.

The paper as well offers proposals on how: (i) state and non-state regulators can apply these behavioral insights on the opportunity costs of non-compliance when designing, implementing and framing their enforcement, deterrence, compliance promotion, communication, outreach and other activities; (ii) regulated entities can employ these insights when designing and implementing their corporate strategies on innovation, product development, marketing, voluntary compliance, and corporate social responsibility; (iii) consumers associations, environmental groups and other civil society groups as well as the academic and consulting communities can employ these insights in their analytical, advisory and advocacy functions; and (iv) more principles and outcomes based, inclusive, polycentric and shared accountability regulatory, legal and policy regimes can make the true and full opportunity costs of non-compliance more vivid, tangible, salient, and actionable for regulated entities and all other regulatory actors.