%0 Report
        %A Basu, Arnab K.
%A Chau, Nancy H.
%A Kanbur, Ravi
        %T Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws
        %D 2007
        %8 2007 Aug
        %I Institute of Labor Economics (IZA)
        %C Bonn
        %7 IZA Discussion Paper
        %N 2998
        %U https://www.iza.org/index.php/publications/dp2998
        %X In many countries, non-compliance with minimum wage legislation is widespread, and authorities may be seen as having turned a blind eye to a legislation that they have themselves passed. But if enforcement is imperfect, how effective can a minimum wage be? And if non-compliance is widespread, why not revise the minimum wage? This paper examines a minimum wage policy in a model with imperfect competition, imperfect enforcement and imperfect commitment, and argues that it is the combination of all three that produces results which are consistent with a wide range of stylized facts that would otherwise be difficult to explain within a single framework. We demonstrate that turning a blind eye can indeed be an equilibrium phenomenon with rational expectations subject to an ex post credibility constraint. Since credible enforcement requires in effect a credible promise to execute ex post a costly transfer of income from employers to workers, a government with an objective function giving full weight to efficiency but none to distribution is shown, paradoxically, to be unable to credibly elicit efficiency improvements via a minimum wage reform.
        %K dynamic consistency
%K minimum wage
%K non-compliance
%K equity and efficiency