Why do regulations yield uneven returns across institutions? I examine this question through a principal-agent model of policy design under asymmetric information. I show that the optimal second-best policy must accept a trichotomy of compliance: low-capacity agents rationally under-comply, intermediate agents bunch at the mandate, and high-capacity individuals over-comply. Mandates and enforcement operate on distinct margins, as mandates shift the entire compliance distribution while enforcement exclusively targets under-compliers. Extending to a dynamic setting, I demonstrate that lack of commitment triggers a ratchet effect where high-capacity agents strategically suppress effort to avoid stricter future mandates. The optimal response is policy gradualism: regulators dampen updates to preserve long-term incentives. These results provide a structural foundation for designing adaptive regulatory systems under institutional heterogeneity.
@unpublished{Calderon2026RegulationsCommitment,
title={Regulatory Mandates under Heterogeneity and Limited Commitment},
author={Calderon, Jose-Ignacio},
year={2026},
note={Working paper}
}