Fly-By-Night Firms, Credit, and Regulation: A Simple Model

  • Philip Routon

Abstract

“Fly-by-night” is a derisive term for a firm that appears to be untrustworthy and/or transient. Previous studies have focused on general fly-by-night firms’ behavior and their interaction with the credit market, while much less has been done to show how they approach government regulation. After a brief explanation of the importance of studying fly-by-night firms and a discussion of some relevant literature, this paper presents a simple model that permits a liability-holding fly-by-night entrepreneur to choose between complying or not complying with a governmental regulation. Though perhaps most useful as a classroom exercise, the model could be used to examine what factors affect the compliance decision and in what way. I find that (i) if we assume fly-by-night firms have relatively lower probabilities of project success, then they are unambiguously less likely to comply with governmental regulations; (ii) an increase in the interest rate on business loans decreases the probability of compliance; and (iii) from a regulatory
standpoint, an increase in inspection rates deters non-compliance, but an increase in the noncompliance fine may not exert deterrence if strategic default is an option.

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How to Cite
ROUTON, Philip. Fly-By-Night Firms, Credit, and Regulation: A Simple Model. Scientia et Humanitas, [S.l.], v. 3, p. 185-196, oct. 2015. ISSN 2470-8178. Available at: <https://libjournals.mtsu.edu/index.php/scientia/article/view/674>. Date accessed: 22 jan. 2020.
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