Laura Birg and Jan S. Voßwinkel

This paper studies the incentives for non-compliant behavior of firms in a two-country duopoly with vertical product differentiation. Both firms have an incentive for non-compliant behavior, while both firms would prefer that the other firm is compliant. The incentive for non-compliance is higher for the high-quality firm than for the low-quality firm. Non-compliant behavior of one firm lowers the incentive for non-compliance by the other firm. A welfare-maximizing government may lack incentives to enforce compliant behavior of the domestic firm.

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