Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2017:19: Competition Makes Inspectors More Lenient: Evidence from the Motor Vehicle Inspection Market

Osmis Habte () and Håkan J. Holm ()
Additional contact information
Osmis Habte: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Håkan J. Holm: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: We examine the impact of competition on firms' leniency towards their customers in a heavily regulated market, which is consciously designed to mitigate incentives to deviate from the regulation. Using a panel data set representing 22.5 million periodic vehicle roadworthiness tests during the period 2010-2015, we show that inspection stations operating in more competitive markets are more lenient to their customers than stations operating in less competitive markets. We present both fixed effects and instrumental variable estimates of the effect of competition on firms' incentive to be lenient to their customers.

Keywords: leniency; pass rate; inspection behavior; competition; deregulation; inspection market

JEL-codes: D22; L11; L84

37 pages, December 22, 2017

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