Two-Stage Game in Law Legislation and Enforcement
Published:
Every Firm is doing unlawful business
Recently, I was chatting with a friend when driving a car, while listening the podcast together at the same time. Must be inspired by some topics in the bodcast, my friend shared a “dark fact” by his friend. He told me that, his friend’s family is doing international trade, particularly about shipping. So his friend told him that, strictly speaking, almost all Chinese foreign-trade firms are now doing unlawful tariff avoidance under the current law and regulations. But the government just turns a blind eye. I have no clue whether this is the fact or being exaggerated, but I will not be surprised if it is true. It makes perfect sense from an economic perspective!
Two Stage Game and Discretionary Law Enforcement
Most economics model/theory are math formalizations of human beings intuitions. What I want to say follow, From the formal it is called two-stage dynamic games. But just plainly speaking, the legistration department has incentive to make the law/regulation DETAILED, STRICT and UNREASONABLE at the first place. This is because with this law, the government has the room to play strategically in the second-stage: if the government feels beneficial or necessary, whether from “good incentive” (e.g. to promote market fairness) or “bad incentive” (e.g. to fine firms and increase government income, “the extractive hand”), it can enforce the law “strictly”; if the government feels not beneficial to strict the law (e.g. to protect these international trade firms), it can just turn their eyes blind. Moreover, this creates the room for rent-seeking, or heterogeneous treatment : for some firms (e.g. with connection, obedient or bribary) the government can choose to not enforce the law; while it can enforce the law and punish other firms. In addition, this can even let the government catch the dirt of firms. The government has the opportnity to punish firms
Key: Legislation and Enforcement are the same party!
The key, as well as the necessary condition in this story is the legistration and enforcement are somewhat the same party (i.e. the party or the government) in the story, or at least they share a large proportion of the same interest. For example, in U.S. the legislation (the house and senate) and the enforcement (police) are diffrerent and share no common interest. This ensures that the legislation will not be too strict.