Effectiveness of regulatory interventions on firm behavior: a randomized field experiment with e-commerce firms

Assessing the effectiveness of regulatory intervention becomes increasingly relevant in the public debate on regulation of economic activities. The liberalization of markets over the past decades has relaxed regulatory constraints on the one hand (Wölfl et al. 2009), but has also resulted in more regulatory overview and enforcement of regulatory rules meant to correct market failures resulting from market power, externalities and information asymmetries. This proliferation of regulatory intervention has led to a growing need for information about its effectiveness and efficiency (Niels and Van Dijk 2008). In particular, concerns about the costs of regulation and the risk of inappropriate measures taken by regulators call for a continuing assessment of how effective regulators operate. Prominent examples of such assessments are the policy evaluation studies conducted by the OECD. These studies analyze the impact of regulatory measures on the macroeconomic performance of countries (see, e.g., Nicoletti and Pryor 2006). Information on the effectiveness of regulation can also be helpful in the debate on the legitimacy of regulatory intervention (Don et al. 2008). Another objective of regulation-effectiveness studies is to increase our understanding of effective strategies to reach regulatory goals. Stafford (2003), for instance, analyzes the effectiveness of different types of hazardous waste regulation and finds that mandatory pollution prevention programs do not affect compliance. Other examples of this type of studies are De Witte and Saal (2010) who find that a light form of price regulation of water utilities is able to foster productivity in the drinking-water industry and Nosenzo et al. (2013) who find that fines are effective in deterring non-compliance with rules, while the effect of bonuses on compliance is weak. On the topic of rule compliance, Telle (2013) concludes that frequent auditing of firms raises their compliance with environmental regulations. In an earlier study, Telle (2009) finds that just the threat of inspection, measured by the predicted probability of inspections, reduces the probability of violation of environmental rules.

Compared to the above interventions, information-related interventions constitute a mild form of regulatory intervention, as they aim to change agent behavior by informing agents about the existence and contents of regulation. Limited previous research suggests such interventions to be promising. For example, Apesteguia et al. (2013) study rules compliance by individuals and analyzes the effects of sending e-mail messages to visitors of libraries based on the speed by which they return items to the library. They find that the e-mail messages help to promote rule compliance, but the authors cannot exclude an alternative explanation, which is that the e-mail messages act as signals that the library cares about rule compliance which triggered the positive response. Iyer et al. (2010), in a study on regulatory compliance by firms, find that informing businesses by sending a letter about the enforcement strategies affects compliance. Communicating higher levels of detection significantly raises compliance with the tax rules. Both studies on information-related interventions suggest that such interventions can be effective, and as they are mild, relatively easy to implement and not expensive to execute regulatory authorities may consider them attractive means to stimulate regulatory compliance. In practice, regulatory authorities commonly use information-related interventions.

To further increase our understanding of the effectiveness of information-related interventions, we focus on three kinds of such interventions: two of them focus on informing individual firms while the remaining intervention aims at informing the entire industry. Our research builds on Apesteguia et al. (2013) but is directed at firms instead of individuals, which enables us to test whether their conclusions can be extended to SMEs. It complements Iyer et al. (2010), who also study firms, because we focus on the different ways of distributing information on legal rules instead of different levels of information on enforcement strategies.

In this paper, we determine the effectiveness of three regulatory interventions that intend to stimulate compliance behavior of SMEs by increasing their awareness of legal obligations. More specifically, we analyze to what extent different regulatory interventions aimed at e-commerce firms by the Dutch Consumer Authority¹ are effective measures to enforce legal obligations on information disclosure. According to Dutch consumer law, e-commerce firms are obliged to present various types of information that are viewed to be useful for consumers in making decisions. Since e-commerce firms tend to be small (over 80 % in our sample is a sole-trader business, see “Appendix 1”) and young (about 50 % is below 3 years), while the rules on information disclosure are relatively new as well, one may expect that these firms are not fully aware of the legal obligations. Hence, informing these firms about the legal rules may raise compliance. As these firms may respond differently to different ways by which the Consumer Authority informs them about the legal rules, we assess the effectiveness of three different interventions. Two interventions are at the firm level, while one is at the group level. Note that implementing the legal rules does not require much effort by the online shop, as the rules only refer to mentioning specific information on specific places on the websites.

The effectiveness of regulatory interventions can be measured by a number of methods. Bergman (2008) distinguishes qualitative studies, such as peer reviews, customer-satisfaction surveys and event studies, and quantitative studies, such as econometric studies on microlevel or macrolevel. Each of these studies consists of an ex post analysis, estimating the effect of past interventions on past events. A critical component of such studies is the definition of the counterfactual development; i.e., the development when the regulatory intervention would not have occurred. One way to account for counterfactual development is to conduct studies in which the circumstances affecting firm behavior are controlled. Experiments, both laboratory and field experiments, are therefore becoming more popular in economic research as they enable researchers to assess, for instance, the impact of a specific regulatory measure on firm behavior, holding all other factors equal (Levitt and List 2009).

In a laboratory experiment, Nosenzo et al. (2013) analyze the impact of fines as well as bonuses on compliance. Laboratory experiments can be helpful in analyzing the impact of specific interventions, but the results of such an experiment cannot directly be translated into daily policy because of the constructed character of the experiment. An advantage of field experiments compared to laboratory experiments is that the former combines the advantages of a controlled laboratory experiment with realism as it works with real-life agents not knowing that they are subject to economic analysis. Field experiments are increasingly used to assess the impact of regulatory interventions. Collins (2013) analyzed the impact of a mandatory financial education program on financial behavior of low-income families which were randomly assigned to a treatment group or a control group. Iyer et al. (2010) applied randomized field experiments to assess the effects of different enforcement strategies on compliance with tax rules. Another example is Apesteguia et al. (2013), who used randomized field experiments to analyze the effects of sending e-mail messages to visitors of libraries on the speed by which they return the items to the library.

Following recent research (e.g., Levitt and List 2009; Iyer et al. 2010; Apesteguia et al. 2013; Collins 2013), we conduct randomized field experiments involving consecutive measurements in which we monitor the compliance with legal obligations by online shops. Using data from the Dutch Chamber of Commerce, we first define two representative samples which are used as a treatment group and a control group. In the first firm-specific intervention (Firm Letter Guidance), each firm in the treatment group receives information on the legal obligations through a personalized² physical letter sent by the Consumer Authority, while the firms in the control group do not receive such information (see “Appendix 2”). Before and after this intervention, we monitor the compliance of both groups of firms. In the second firm-specific intervention (Firm Email Guidance), a personalized e-mail was sent to all firms in the treatment group similar to the letter in the first intervention (see “Appendix 3”). This e-mail was sent about 1.5 year after the firms had received the letter by post mail. Again, we monitor the compliance behavior of both groups before and after the intervention. This e-mail also includes a hyperlink to the website of the Consumer Authority which gives more detailed information on how online shops should look like. The Industry Guidance concerns the Consumer Authority providing information on the legal obligations to all firms in the industry by means of various dedicated publications and presentations in public media. We monitor the compliance of all firms before and a few months after the Industry Guidance was given.

The advantages of our research design include avoidance of non-compliance and self-report bias (Collins 2013), since we observe whether information is disclosed on a firm’s website. The observations are unobtrusive as the online shops are not informed about the measurements. The design does suffer from attrition, which is common in longitudinal research, as several websites disappeared during our study period or ceased to be an online shop. The data are collected by visiting each website to determine the availability of information elements by applying a detailed data-collection instrument (see Sect. 3.3).

At the baseline, about 10–25 % of the online shops do not provide the legally required information on firm characteristics, transaction costs and the order process. Regarding two other aspects, the initial compliance of the online shops is even much worse: 60–70 % do not provide the necessary information regarding the time window to reconsider a purchase and the payment process. These observations confirm our expectation mentioned above that the compliance of e-commerce firms with legal rules on information disclosure is not high. With respect to the regulatory interventions, however, we find that none of the interventions has a significant effect on firm behavior, neither in the short term nor in the long term. During the study period, firm compliance with the legal rules on information disclosure changed hardly, no matter which intervention was used by the Consumer Authority. Although information-related interventions are commonly used in practice, our research suggests that such regulatory interventions in the form of providing only guidance to SMEs can fail to influence firm behavior. Our findings underscore the need for economic regulators to design regulatory policies with proven effectiveness and highlight our limited understanding of what makes SMEs comply with legal obligations.

The structure of this paper is as follows. Section 2 discusses the background of the regulation on information disclosure by e-commerce firms. Section 3 describes the field study, including the design of the randomized field experiments, the interventions, the various measurements and the design of the econometric analysis. Section 4 presents the results, which refer to the initial compliance, the effects of the two types of firm-specific guidance and the effects of the Industry Guidance. Section 5 concludes with the policy implications of our study and suggestions for further research.

Technological innovations in the telecommunication industry have had major effects on consumers and producers. One of these consequences is the rapid growth in business-to-business and business-to-consumer e-commerce. The share of e-commerce in total turnover of industries was approximately 15 % on average in the industrialized countries in 2012 (OECD 2013). E-commerce appears to have a significant impact on economic growth and trade (Terzi 2011). Buying and selling goods and services through the Internet have many advantages. Online shops give buyers access to global markets with a large variety in products, while sellers can use the Internet for enlarging the geographical area of their market (Grandon and Pearson 2004). Hence, e-commerce educes transactions costs and increases the transparency of the supply of goods and services (Santarelli and D’Altri 2003).

A precondition for online shops to be a good alternative for consumers is that consumers can trust the information online shops provide about the characteristics of the merchandise, payment conditions, delivery process, privacy and security (Belanger et al. 2002; OECD 2011). Customers of online shops fully depend on the information on the website, while customers of normal (physical) shops can gather information on the quality of products by actually experiencing (e.g., seeing, hearing, feeling) products before making a purchase decision. Moreover, customers of physical shops can deduce the trustworthiness of the shop by visiting the shop and observing and talking to the seller, while the trustworthiness of an online shop is more difficult to assess. So, while consumers always have to deal with imperfect information regarding so-called experience goods and in particular credence goods (Rischkowsky and Döring 2008), this information asymmetry is enlarged when buying such products online. The information asymmetry may result in several inefficiencies, such as consumers buying low-quality products or refraining from buying due to a lack of confidence.

As online sellers have an interest in a positive attitude of customers regarding their merchandise, they have an incentive to provide information that may increase the trustworthiness of their shop. Feindt et al. (2002) find that an informative website that fosters interaction with customers is one of the critical success factors for e-commerce firms. For the market for higher education, for instance, Mause (2010) finds that sellers have incentives to organize a quality information system with the help of private-party intermediaries, making regulatory intervention to protect the buyers on this market unnecessary. This does not mean, however, that online sellers always have an incentive to be as informative as possible. Online sellers in particular have an incentive to design their online shop to maximize consumer expenditures (Belanger et al. 2002). So, regulatory intervention might be needed to realize full transparency in online consumer markets.

Governments can choose from a number of options to reduce the information asymmetry, such as subsidizing private provision of product information, making the disclosure of product information legally obligatory and protecting consumers against deceptive advertising by sellers (Mause 2010). Regarding online shops registered in the Netherlands, the Dutch government has chosen to implement information-disclosure rules in consumer legislation. The Dutch consumer law stipulates online shops to provide information to customers regarding a number of key characteristics, including the contact details of the firm, the cost structure of purchases, the existence of a time window for reflection (to cancel a purchase) and the processes of ordering, paying and delivery (ACM 2012). Maintaining these rules is delegated to the Consumer Authority. This authority regularly monitors whether firms’ behavior is in line with consumer law. If not, the Consumer Authority has the legal power to take punishment measures, including to hand out monetary penalties. The Consumer Authority uses several instruments to influence firm behavior. One of these instruments is submitting guidance, i.e., distributing information on the contents of legal rules, the necessity to obey such rules and the possible legal consequences of non-compliance. In this paper, we assess to what extent such instruments are effective in raising the compliance with information-disclosure rules of e-commerce firms.

Note that improving the effectiveness of the enforcement of the legal rules on information disclosure does not necessarily imply that consumers will make better decisions. Psychological factors, as selective optimism, the endowment effect and bounded rationality, may cause that well-informed consumers make decisions which are not in their self-interest (Faure and Luth 2011). The existence of these factors does, however, not imply that consumers do not benefit from measures which reduce the information asymmetry in consumers markets. Hence, searching for effective regulatory measures to reduce the information asymmetry might increase the welfare of consumers, even if they behave less rationally as is generally assumed in economic models.

Consumer markets are known to be vulnerable for problems of information asymmetry, resulting in inefficient market outcomes. This holds in particular for online consumer markets due to the limited opportunities to experience merchandise before making a purchase decision. Because of this market failure, governments may implement a number of regulatory measures, including legal obligations regarding the pre-purchase information firms need to disclose. The effectiveness of such obligations depends on the strength of enforcement. In this paper, we assess the effectiveness of enforcing the legal obligations on online shops, by three regulatory interventions, each informing the SMEs in a different way about the content and importance of legal obligations.

We find that the initial level of non-compliance of the online shops is considerable. Giving these firms guidance through the personalized letters has a small effect on compliance in the short term. In the longer term, however, this effect disappears. Also the Industry Guidance has hardly any effect on firm compliance behavior. Our study design with an experimental as well as a control group plus the use of panel analysis enabled us to control many factors that could possibly bias the results. We therefore conclude that the lack of effects results from the ineffectiveness of the regulatory interventions. Although information-related interventions are commonly used, our research suggests that regulatory interventions in the form of providing only guidance to firms can be ineffective in influencing their behavior. Firms do not seem to change their behavior in response to just receiving more information on legal obligations. Although both letters, which were personalized and sent by the Consumer Authority to each firm in the treatment group, mention the legal power of the authority to fine non-complying firms, this threat is apparently not strong enough to have firms adapt their behavior.

This result differs from Apesteguia et al. (2013) who concluded that sending e-mail messages with information regarding rules helps to promote compliance. One possible reason for the marked differences in intervention effectiveness is related to differences in the economic agents (SMEs vs. individuals), since firms may make a more rational analysis of the expected costs of violating rules (Telle 2009, 2013). If firms are already well aware of the legal requirements, any additional information on these rules can be expected not to have any additional effect. Insofar, firms were not well informed, and additional information may only raise compliance if the (rational) firms expect that the marginal benefits of compliance exceed the marginal costs. Note also that the administrative costs of compliance are viewed to be small since only a limited number of information needs to be given on specific places within the websites. Since the guidance was restricted to giving information on the rules while the ability of the Consumer Authority to fine firms for not complying was mentioned but not stressed very much, the expected marginal benefits of compliance may be negligible as well. Hence, not responding to the information provided by the Consumer Authority may be a rational firm strategy.

More research is needed to explain the absence of almost any effect of the information interventions aimed at firm compliance. Further research could focus on the reasons why e-commerce firms, which are usually small and young firms, do hardly respond to information on the legal obligations. As two interventions included a personalized letter to the firm, not being aware of the legal obligations is unlikely the reason for non-compliance behavior in our study. A more in-depth understanding of non-compliance behavior will help regulatory authorities in designing effective interventions. Further research could also focus on the timing of the measurements; we measured compliance about 2.5 months after an intervention to allow the online shops enough time to make the required changes, and further research could explore how much time firms actually need for implementing such changes.

Based on our findings, we formulate the following three implications for regulatory authorities. First, although regulatory authorities need to inform SMEs about legal obligations, they also need to realize that just informing them about the legal rules may be not sufficient to change their behavior. Adding firm-specific information about their actual individual compliance with these rules is a potential improvement of such a strategy. In addition to communicating legal obligations and the regulator’s ability to fine, serious regulatory threats are likely needed in order to have a significant influence on firm behavior (Iyer et al. 2010).

Second, regulatory authorities may consider more creative interventions that could be effective if they have important consequences for the economic agents. For example, the regulatory authority in our study may consider involving consumer advocate organizations and even individual consumers in interventions. Consumer advocate organizations could report scores (rankings) of firms complying with a varying extent to legal obligations (e.g., by using our measurement model), while consumers could adjust their purchase behavior in response to such information. The resulting bad publicity and missing sales may be effective in changing firm behavior (see De Witte and Saal 2010).

Third, research into the effectiveness of government interventions may benefit from adopting our randomized field experimental design. Following and extending previous effectiveness studies based on field experiments (e.g., Apesteguia et al. 2013; Collins 2013; Iyer et al. 2010), we have shown that such a design is a powerful, accurate and realistic way to study how effective interventions are in both the short and long terms. The distinction between a treatment group and control group allows researchers to control changes in the environment that are beyond control of the researcher but that could affect intervention effectiveness.

Although regulatory interventions are found in many situations and in many forms, we still lack knowledge with regard to their effectiveness and efficiency (Niels and Van Dijk 2008). This paper provides clear evidence that at least not all interventions aimed at SMEs are effective. The information-related interventions were hardly effective in changing the behavior of e-commerce firms. In combination with the importance of regulatory interventions for national economic policies and the current lack of understanding of their effectiveness, more field research is needed to explore this issue.