Confession Is Good For Soul And Equilibrium But Maybe Not Justice

Recently, I read this article about how the Department of Labor, the Internal Revenue Service and states are targeting pay practices of home builders. This got me thinking about how industry enforcement sweeps can be a very effective enforcement tool.

Suppose, for example, an enforcement sweep involves only two firms that do not communicate with each other. If both firms concede the regulator’s position, they will be given some credit for cooperation and fined only $10,000. If one resists and the other concedes, then the resistor is punished with a more hefty penalty of $25,000 while the other firm receives a very modest slap on the wrist of $1,000. If both firms resist, they each receive a penalty of $3,000. This is the classic “prisoners’ dilemma” and is summarized by the following table...

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