The Role of Warnings in Regulation: Keeping Control with Less Punishment

Karine Nyborg and Kjetil Telle

No 24/2003, Memorandum from Oslo University, Department of Economics

Abstract: Regulatory agencies frequently present violators with warnings, not pursuing prosecution if the violation ceases upon receipt of the warning. We show how such warnings may help regulators to keep control: Prosecution is costly for the regulator, and insu.cient prosecution e.orts yield low penalties. Thus, with a limited regulatory budget, threats of harsh sanctions are credible only if the number of violators is low. This produces multiple Nash equilibria. If firms may make mistakes, the economy can accidentally switch from one equilibrium to another. Warnings reduce substantially the probability of such accidental switches from the high to the low compliance equilibrium.

Keywords: Enforcement; warnings; multiple equilibria. (search for similar items in EconPapers)
JEL-codes: D62 K42 L51 Q28 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2003-12-01
New Economics Papers: this item is included in nep-com and nep-law
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Citations: View citations in EconPapers (3)

Published in Journal of Public Economics, 2004, pages 2801-2816.

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:osloec:2003_024

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