Trust and compliance∗

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Abstract
When regulatory inspectors trust industry, is this trust abused in a way that reduces regulatory compliance? Or does trust foster the internalization of regulatory objectives by regulated managers? Does trust build goodwill that translates into improved voluntary compliance? Data on compliance by Australian nursing homes with quality of care standards supports the latter interpretation. Nursing homes experience improved compliance after regulatory encounters in which facility managers believe that they have been treated as trustworthy. This finding commends a dynamic regulatory strategy of dialogue and trust as a first choice followed by escalation to more punitive regulation when trust is abused. Responsive versus static regulatory strategies and communitarian versus hierarchical fiduciary conceptions of guardianship are advanced as implications for resolving the dilemmas of trust and compliance.