Firms' Compliance with Complex Regulations

This study addresses the question of what explains compliance with complex regulations, which are technical, extensive, and often subject to modifications. Based on official (anonymized) data of financial intermediaries in the Netherlands (N = 602), we examined the association between compliance (measured as number of law violations) and the extent to which regulatory complexity is perceived as fair (i.e., the perception that the extensive regulation generates unnecessary difficulties for the firm). We hypothesized that perceiving regulatory complexity as fair would motivate firms to acquire knowledge of the regulation, and that this knowledge in turn would improve their ability to comply. In line with our hypothesis, the results of a series of tests show that knowledge mediates the association between perceived fairness and compliance (95% confidence intervals). These findings indicate that (a) regulatory complexity is not necessarily unfair, (b) the well-established direct association between fairness perceptions and compliance is less straightforward when regulations are highly complex (because it involves a fundamental mediating mechanism), and (c) firms' compliance behavior may respond to not only cost-benefit analyses, but also to fairness perceptions about the law.