Compliance Moral Hazard and the Backfiring Mandate

• URL: http://arxiv.org/abs/2604.21789v2
• Date: Sun, 26 Apr 2026 18:07:53 GMT
• Title: Compliance Moral Hazard and the Backfiring Mandate
• Abstract summary: Competing firms that serve shared customer populations face a fundamental information aggregation problem.<n>We develop a mechanism design framework for decentralized risk analytics grounded in anti-money laundering in banking networks.<n>We show competitive pressure amplifies compliance moral hazard and poorly designed mandates can reduce welfare below autarky.
• Score: 6.584016782022881
• License: http://arxiv.org/licenses/nonexclusive-distrib/1.0/
• Abstract: Competing firms that serve shared customer populations face a fundamental information aggregation problem: each firm holds fragmented signals about risky customers, but individual incentives impede efficient collective detection. We develop a mechanism design framework for decentralized risk analytics, grounded in anti-money laundering in banking networks. Three strategic frictions distinguish our setting: compliance moral hazard, adversarial adaptation, and information destruction through intervention. A temporal value assignment (TVA) mechanism, which credits institutions using a strictly proper scoring rule on discounted verified outcomes, implements truthful reporting as a Bayes--Nash equilibrium (uniquely optimal at each edge) in large federations. Embedding TVA in a banking competition model, we show competitive pressure amplifies compliance moral hazard and poorly designed mandates can reduce welfare below autarky, a ``backfiring'' result with direct policy implications. In simulation using a synthetic AML benchmark, TVA achieves substantially higher welfare than autarky or mandated sharing without incentive design.

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