Testing an Expected Utility Model of Corporate Deterrence

TLDR

The narrow range of sanctions in nursing‑home quality regulation allows a fuller specification of an expected‑utility deterrence model than prior studies. This study is the first quantitative perceptual deterrence analysis of corporate, rather than individual, deterrence. The authors interviewed 410 chief executives of small organizations and examined their officially recorded compliance with regulatory standards. Partial support is found for certainty of detection predicting compliance, but certainty or severity of sanctioning, expected corporate disutility, CEO characteristics (for‑profit status, ownership, sanction salience, emotionality, belief in law), and low compliance costs do not significantly influence deterrence effectiveness.

Abstract

This article reports on the first quantitative perceptual deterrence study of corporate (rather than individual) deterrence. The study is based on interviews with 410 chief executives of small organizations and their officially recorded compliance with regulatory standards. We find partial support for the certainty of detection as a predictor of both self-reported and officially recorded compliance but no support for the certainty or severity of sanctioning. The narrow range of sanctions available in the particular regulatory domain studied (regulation of nursing home quality) has enabled a fuller specification than was possible in previous studies of an expected utility model for all available sanctions. Managers' expected corporate disutility from all sanctions fails to explain compliance. Deterrence does not work significantly more effectively for chief executives (a) of for-profit versus nonprofit organizations, (b) who are owners compared with those who are not owners, (c) who say they think about sanctions more (sanction salience), (d) who may better fit the rational choice model in that they are low on emotionality, (e) who have a weaker belief in the law. Nor is deterrence more effective when compliance costs are low.