Inspection Intensity and Market Structure

Stéphan Marette
October 2005  [05-WP 412]

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Suggested citation:

Marette, S. 2005. "Inspection Intensity and Market Structure." Working paper 05-WP 412. Center for Agricultural and Rural Development, Iowa State University.


An investigation of financing an inspection policy while allowing the enforcement of a market regulation is described. A simple model shows that the intensity of controls depends on the market structure. Under a given number of firms, the per-firm probability of controls is lower than one, since firms' incentive to comply with regulation holds under positive profits. In this case, a lump-sum tax is used for limiting distortions coming from financing with a fixed fee. Under free entry, the per-firm probability of controls is equal to one, and only a fixed fee that prevents excess entry is used to finance inspection.

Keywords: inspection policies, market regulation, regulatory funding.