The Warnings Puzzle: An Upstream Explanation

Posted: 5 May 2017

See all articles by Timo Goeschl

Timo Goeschl

University of Heidelberg - Alfred Weber Institute for Economics

Johannes Jarke-Neuert

University of Hamburg - Department of Socioeconomics

Date Written: June 7, 2013

Abstract

Enforcement agencies issuing warnings are an empirical regularity in the enforcement of laws and regulations, but a challenge to the standard economic theory of public enforcement. A number of recent contributions explain the popularity of warnings as a response to information asymmetries between regulator and regulatee. We offer a distinct, but complementary explanation: Warnings can serve as a signaling device in the interaction between the enforcement agency and its budget-setting authority. By using costly warnings for minor offenses that would otherwise not be pursued, the agency can generate observable activity to escape budget cuts in subsequent periods. We show in a stylized model that warnings may indeed occur in an equilibrium of a game in which warnings are entirely unproductive in the agency-regulatee interaction, and thereby derive a testable hypothesis on regulatory agency behavior.

Keywords: Warnings, Enforcement, Information Asymmetry, Signaling

JEL Classification: H11, H83, K42

Suggested Citation

Goeschl, Timo and Jarke-Neuert, Johannes, The Warnings Puzzle: An Upstream Explanation (June 7, 2013). Journal of Regulatory Economics, Volume 44, Issue 3, pp. 339–360, December 2013, Available at SSRN: https://ssrn.com/abstract=2962847

Timo Goeschl

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Bergheimer Str. 20
D-69115 Heidelberg
Germany

Johannes Jarke-Neuert (Contact Author)

University of Hamburg - Department of Socioeconomics ( email )

Welckerstrasse 8
Hamburg, Hamburg D-20354
Germany

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