Corporate Monitors : Overcoming the Classification Failure of Targeted Monitoring Systems

Targeted monitoring systems have been embraced by many law and economics scholars, demonstrating that regulatory monitoring that prioritizes targets may efficiently increase the level of compliance. Only a few scholars, however, have paused to consider what criteria enforcement authorities should use to classify regulatees into differently-monitored groups. In this paper, I high-light the weaknesses of the classification criteria considered by the scholarly literature to date. Those criteria include (i) violation records, (ii) implementation of compliance programs, and (iii) the self-reporting of violations. I also develop a theoretical model that underlies an improved framework of targeted monitoring. The proposed framework is based on the appointment of independent corporate monitors as a signaling mechanism that creates an efficient targeted monitoring system. The proposed framework, which is applicable in a wide range of regulatory areas, enlists more corporations to become proactive in the battle against misconduct, while economizing the overall costs of public enforcement