This paper analyzes a model in which a firm's compliance with regulation is monitored by a
supervisor. The supervisor exerts costly, unobservable effort to raise his inspection intensity,
which leads to moral hazard. A non-compliant firm may exert effort in avoidance to reduce
the probability of sanction. The regulatory framework is such that inspections may be
announced or unannounced. Our analysis derives novel results about the response of
monitoring and avoidance to changes in inspection policies, as well as conditions under …