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

Author

Listed:
  • Nyborg, Karine

    (Ragnar Frisch Centre for Economic Research)

  • Telle, Kjetil

    (Division for Resource and Environmental Economics, Research Department, Statistics Norway)

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.

Suggested Citation

  • Nyborg, Karine & Telle, Kjetil, 2003. "The Role of Warnings in Regulation: Keeping Control with Less Punishment," Memorandum 24/2003, Oslo University, Department of Economics.
  • Handle: RePEc:hhs:osloec:2003_024
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    References listed on IDEAS

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    More about this item

    Keywords

    Enforcement; warnings; multiple equilibria.;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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