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The role of warnings in regulation: keeping control with less punishment

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  • Nyborg, Karine
  • Telle, Kjetil

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 88 (2004)
Issue (Month): 12 (December)
Pages: 2801-2816

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Handle: RePEc:eee:pubeco:v:88:y:2004:i:12:p:2801-2816

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Web page: http://www.elsevier.com/locate/inca/505578

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References

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  1. Kandori, M. & Mailath, G.J., 1991. "Learning, Mutation, And Long Run Equilibria In Games," Papers 71, Princeton, Woodrow Wilson School - John M. Olin Program.
  2. Assar Lindbeck & Sten Nyberg & Jšrgen W. Weibull, 1999. "Social Norms And Economic Incentives In The Welfare State," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 1-35, February.
  3. Jorgen W. Weibull, 1997. "Evolutionary Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262731215, January.
  4. Livernois, John & McKenna, C. J., 1999. "Truth or consequences: Enforcing pollution standards with self-reporting," Journal of Public Economics, Elsevier, vol. 71(3), pages 415-440, March.
  5. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  6. Damme, E.E.C. van & Weibull, J., 1998. "Evolution with Mutations Driven by Control Costs," Discussion Paper 1998-94, Tilburg University, Center for Economic Research.
  7. McKenna, C.J. & Livernois, J., 1996. "Truth or Consequences? Enforcing Pollution Standards," Working Papers 1996-7, University of Guelph, Department of Economics and Finance.
  8. Steven Shavell & A. Mitchell Polinsky, 2000. "The Economic Theory of Public Enforcement of Law," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 45-76, March.
  9. Nyborg, Karine & Telle, Kjetil, 2004. "A dissolving paradox: Firms’ compliance to environmental regulation," Memorandum 02/2004, Oslo University, Department of Economics.
  10. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, January.
  11. Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October.
  12. Devon Garvie & Andrew Keeler, 1993. "Incomplete Enforcement with Endogenous Regulatory Choice," Working Papers 873, Queen's University, Department of Economics.
  13. Telle, Kjetil, 2013. "Monitoring and enforcement of environmental regulations," Journal of Public Economics, Elsevier, vol. 99(C), pages 24-34.
  14. Heyes, Anthony & Rickman, Neil, 1999. "Regulatory dealing - revisiting the Harrington paradox," Journal of Public Economics, Elsevier, vol. 72(3), pages 361-378, June.
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Citations

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Cited by:
  1. Kjetil Telle, 2012. "Monitoring and enforcement of environmental regulations. Lessons from a natural field experiment in Norway," Discussion Papers 680, Research Department of Statistics Norway.
  2. Telle, Kjetil, 2013. "Monitoring and enforcement of environmental regulations," Journal of Public Economics, Elsevier, vol. 99(C), pages 24-34.
  3. Kjetil Telle, 2004. "Effects of inspections on plants' regulatory and environmental performance - evidence from Norwegian manufacturing industries," Discussion Papers 381, Research Department of Statistics Norway.
  4. Marcello Basili & Filippo Belloc & Simona Benedettini & Antonio Nicita, 2012. "Warning, Learning and Compliance: Evidence from Micro-data on Driving Behavior," Department of Economics University of Siena 639, Department of Economics, University of Siena.
  5. Marit E. Klemetsen & Brita Bye & Arvid Raknerud, 2013. "Can non-market regulations spur innovations in environmental technologies? : A study on firm level patenting," Discussion Papers 754, Research Department of Statistics Norway.
  6. Nyborg, Karine & Telle, Kjetil, 2004. "A dissolving paradox: Firms’ compliance to environmental regulation," Memorandum 02/2004, Oslo University, Department of Economics.
  7. Rousseau Sandra, 2005. "The use of warnings when intended and measured emissions differ," Energy, Transport and Environment Working Papers Series ete0508, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Energy, Transport and Environment.
  8. Rousseau, Sandra & Telle, Kjetil, 2010. "On the existence of the optimal fine for environmental crime," International Review of Law and Economics, Elsevier, vol. 30(4), pages 329-337, December.
  9. Jean-Michel Glachant, 2012. "Regulating Networks in the New Economy," Review of Economics and Institutions, Università di Perugia, vol. 3(1).
  10. Benedettini, Simona & Nicita, Antonio, 2012. "The costs of avoiding accidents: Selective compliance and the ‘Peltzman effect’ in Italy," International Review of Law and Economics, Elsevier, vol. 32(2), pages 256-270.
  11. Brekke, Kjell Arne & Nyborg, Karine, 2008. "Attracting responsible employees: Green production as labor market screening," Resource and Energy Economics, Elsevier, vol. 30(4), pages 509-526, December.
  12. Antonio Nicita & Simona Benedettini, 2012. "The Costs of Avoiding Accidents.Selective Compliance and the 'Peltzman Effect' in Italy," Department of Economics University of Siena 631, Department of Economics, University of Siena.
  13. Glachant, Jean-Michel & Dubois, Ute & Perez, Yannick, 2008. "Deregulating with no regulator: Is the German electricity transmission regime institutionally correct?," Energy Policy, Elsevier, vol. 36(5), pages 1600-1610, May.
  14. Rousseau, Sandra, 2009. "The use of warnings in the presence of errors," International Review of Law and Economics, Elsevier, vol. 29(3), pages 191-201, September.
  15. Mungan, Murat C., 2010. "Repeat offenders: If they learn, we punish them more severely," International Review of Law and Economics, Elsevier, vol. 30(2), pages 173-177, June.
  16. Arun Malik, 2007. "The Desirability of Forgiveness in Regulatory Enforcement," Working Papers 2008-14, The George Washington University, Institute for International Economic Policy.
  17. Suurmond, Guido, 2007. "The effects of the enforcement strategy," MPRA Paper 21142, University Library of Munich, Germany.

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