Anti‐Corruption Policies for Surprise Inspections: Fighting Enforcer's Bribes or Informant's Tips?

ABSTRACT Regulators utilize surprise inspections to facilitate firms' regulatory compliance. Surprise inspections are valuable because they catch non‐compliant firms “off‐guard,” preventing them from hiding incriminating evidence. However, surprise inspections encourage tip‐offs, wherein a firm pays an informant to warn them about an upcoming inspection, thereby allowing the firm to conceal incriminating evidence. We study the relationship between tipping‐off and bribing an official to avoid a fine, another form of corruption. We show that discouraging bribery encourages tipping‐off. Accordingly, the optimal policy that balances these two countervailing effects will sometimes target only tipping‐off even when it is feasible to fully eliminate bribery.