Applying game theory to the protection of public funds: Some introductory notes

Regulatory agencies responsible for preventing misuse of public funds do not all operate in the same fashion. Some carefully weigh the costs and benefits associated with various enforcement policies, but others do not. We use game theory to suggest that (1) regulatory agencies actually have a range of enforcement options at their disposal and (2) these enforcement options can have quite different cost-benefit ratios, depending on the resources of the enforcement agency, the nature of its connection to principals, and the strategies adopted by opportunistic actors. We conclude that enforcement organizations must be flexible in order to be effective.