Economic Theories of Firm Behavior: Using Normative Theories of Compliance

Although economists usually focus on economic analysis of environmental monitoring and enforcement, it is important to note that economists do not have a monopoly on theories of compliance. Sociologists and social psychology analysts also study regulatory compliance issues. In contrast to the positive perspectives, the normative perspectives generally assume that some compliance is due to social norms and the fact that individuals generally want to abide by laws they understand (Bardach 1982). People choose to obey the law because they believe the law is just and consistent with their personal morality, irrespective of assessments of harms or pleasure derived from breaking the law. Thus, government enforcement agencies might have two tools at their disposal - "deterrence" and "cooperation." Compliance takes on more of a moral tone in this literature, and is expected to be greater when individuals and firms believe the rules are legitimate and fairly applied.

Kuperan & Sutinen (1998) provide a good introduction to the importance of socializing processes in affecting behavior. Compliance with rules and regulations is hypothesized to be related to both the internal capacities of the individual and the external influences of the environment, where the socialization process is the linkage between the individual and society. Psychological theories such as social influence explain how the socialization process works with respect to compliance behavior.

1. Social Influence Theory
Social influence refers to the ways people alter the attitudes or behaviors of others, either directly or indirectly. Two important topics studied by researchers on social influence are conformity and obedience.

a)Conformity: When someone changes her or his attitudes or behaviors so that they are consistent with those of other people or with social norms, the person is exhibiting conformity, or trying to fit in. An individual may adopt positive, pro-social behaviors such as by wearing seatbelts, volunteering time and money to a charity, or buying only products that are safe for the environment. Sometimes, however, conformity leads to counterproductive, antisocial behaviors, such as drug abuse, or mob action (Lefton 2000).

Groups strongly influence conformity. Studies show that individuals conform to group norms even when they are not pressured to do so. Similarly, the desire to conform can induce people to do things they might not do otherwise. An infamous example is the My Lai massacre, in which American soldiers’ slaughtered Vietnamese civilians during the Vietnam War. Although several factors account for the soldiers’ behavior (including combat stress, and obedience to authority), the soldiers also yielded to extreme group pressure (Lefton 2000).

Arguments about the importance of reference groups in providing sources of learning and support for deviant behavior have a considerable history in the social sciences. Lening, Steven & Zhou (1999) suggest that people become criminals because of excessive exposure to the criminal behavior patterns exhibited by people with whom they have relatively intimate relations. Other investigators such as Young (1979), and Sutinen, Rieser & Gauvin (1990) have demonstrated that deviant behavior can be inhibited when individuals are embedded within a network of cohesive social groups that disapprove of those behaviors.

Motivational theory asserts that individuals learn to dislike specific individuals (competitors) and then generalize that dislike to whole classes of similar individuals (races, religions, or cultures). If people are raised to compete against others for scarce resources, the competition can foster negative feelings about those competitors. Research with children, adolescents, and adults shows that people who are initially seen as friends or as neutral are sometimes treated badly if they become competitors (Gaines & Reed 1995).

Lefton (2000) suggested that factors such as amount of information, relative competence, position within a group, and public nature of behavior of the group can influence individuals to conform. The most important factor in determining conformity variable is the amount of information provided or available when a decision is to be made. When people are uncertain of how to behave in ambiguous situations, they seek the opinions of others.

The role of community pressure and other forms of informal sanctions are also explored in Pargal & Wheeler (1996) and Konar & Cohen (1997). These two papers generally find support for informal community pressure and social norms as playing important roles in compliance.

b) Obedience. Obedience is compliance with the orders of another person or group of people. The studies on obedience by Stanley Milgram (1965) showed that ordinary people were willing to comply with the wishes of others, especially if they saw the others as legitimate authority figures. For example, children learn that authority figures, such as teachers and parents, know more than they do and that taking their advice generally proves beneficial. As adults, they maintain those beliefs and apply them to authority figures such as employers, judges, government leaders, and so on.


2. Cognitive Theory
In the study of motivation, cognitive theory is an explanation of behavior that asserts that people actively and regularly determine their own goals and the means of achieving them through thought (Lefton 2000). According to cognitive theory, the key variable determining compliance is the individual’s personal morality.
Cialdini (1994) argues that there are so many events, circumstances, and changing variables in their lives that people cannot easily analyze all the relevant data about one thing. People thus devise mental shortcuts to help them make decisions. One of those shortcuts is to stereotype individuals and the groups they belong to – for example, all homeless people, all men, and all lawyers. By devising such shortcuts in thinking, people develop ideas about who is a member of a group to which they belong or want to belong. The division of the world into groups labeled “in” versus “out” or “us” versus “them” is known as “social categorization.”

In a study of compliance with the law, Tyler (1990) reviews different perspectives from which individual behavior has been explained in the social sciences. From his discussion, two main categories of factors that could influence compliance with regulations are: (i) personal morality: the individual’s sense of what is right and wrong. This may or may not be in accord with the regulation considered and its objectives, and may thus act in favor of or against compliance; and (ii) the legitimacy of the regulation, the regulatory process and the regulatory authority. This relates to the recognition (or denial) by individuals of the right of an external authority to dictate their behavior, whatever the nature and consequences of the obligations imposed on them. It will therefore always act in favor of compliance.


3. Summarizing Important Features of the Normative Theory
The Normative theory of compliance is concerned with what people consider as just and moral, as opposed to what is in their self-interest. The analysis emphasizes on the relationship between normative commitment to legal authorities and compliance behavior. Normative commitment through ‘personal morality’ means obeying a law because one feels that the law is just, while normative commitment through ‘legitimacy’ means obeying the law because one feels that the authority enforcing the law has the right to dictate behavior. Normative theory also show that ‘social pressure’ can influence individuals’ compliance decisions.