In a previous RIKINote (4-8-2018), linear and non-linear models were discussed on a very broad scale. In this note, the Theory of Regulatory Compliance is being suggested as a non-linear paradigm to the dominant neoclassical economic theory and the linear mathematical modeling of econometrics.

The Theory of Regulatory Compliance is based upon several empirical studies conducted in the human services which states that the relationship between regulatory compliance and program quality is not a linear relationship when comparing the upper ends of the compliance x quality continuum. The relationship between regulatory compliance and program quality is linear at the lower end of the continuum when one is looking at non-optimal regulatory compliance up to a mediocre level of regulatory compliance. But once substantial regulatory compliance and full (100%) regulatory compliance are attained, there is a plateau or diminishing return effect when it comes to corresponding program quality levels. In other words, from an outcomes perspective, it is not a worthwhile use of resources to be in full regulatory compliance as versus substantial regulatory compliance. This result has been demonstrated in several studies in the human services field across the USA and Canada.

Why is this an important finding? Because there has always been an assumption that regulatory compliance is a linear variable. But based upon the Theory of Regulatory Compliance, it appears that it is truly a non-linear variable and it would change any mathematical equation within econometrics that introduces regulatory analysis. This could go a long way in explaining many of the disparities in pricing regulations and supply/demand economics where regulations are heavily represented. Could the econometric mathematical modeling be more finely tuned by adding a non-linear paradigm to the formula generation via regulatory compliance?