This paper looks into the basic economic theory of incentives and how they can be used to enhance compliance in financial regulation.
This paper has been authored by two leading academics on the economics of tax systems, Gareth Myles and Chris Heady. We decided to consider what lessons we might learn from tax authorities because in some ways they have a harder job than financial regulators in promoting compliance. First, tax payments are a pure cost with no direct benefits for businesses making the payments. Second, tax authorities on average know less about most taxpayers than financial regulators know about regulated firms.
At the heart of any regulatory process is providing incentives that encourage regulated firms to comply. This paper reviews the basic economic theory of incentives and how they can be used to enhance compliance. It considers incentives theory as applied to tax compliance since it has many similarities to compliance with financial regulations and a much longer history of effort by authorities to improve it.
Christopher Heady – University of Kent
Gareth D. Myles – University of Exeter
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