Compliance Moral Hazard and the Backfiring Mandate

Jian Ni, Lecheng Zheng, John R Birge
4/23/2026
cs.GTcs.LG

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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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Cite this paper

@article{ni2026compliance,
  title  = {Compliance Moral Hazard and the Backfiring Mandate},
  author = {Jian Ni and Lecheng Zheng and John R Birge},
  year   = {2026},
  eprint = {2604.21789},
  archivePrefix = {arXiv},
  url    = {http://arxiv.org/abs/2604.21789v1}
}

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