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

University of Oslo Economics Working Paper No. 24/2003

29 Pages Posted: 28 Sep 2003  

Karine Nyborg

University of Oslo - Department of Economics; IZA Institute of Labor Economics

Kjetil Telle

Statistics Norway - Research Department

Date Written: August 19, 2003

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 insufficient prosecution efforts 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

JEL Classification: D62, K42, L51, Q28

Suggested Citation

Nyborg, Karine and Telle, Kjetil, The Role of Warnings in Regulation: Keeping Control with Less Punishment (August 19, 2003). University of Oslo Economics Working Paper No. 24/2003. Available at SSRN: https://ssrn.com/abstract=443200 or http://dx.doi.org/10.2139/ssrn.443200

Karine Nyborg (Contact Author)

University of Oslo - Department of Economics ( email )

P.O.Box 1095 Blindern
Oslo, N-0317
Norway

HOME PAGE: http://folk.uio.no/karineny/

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Kjetil Telle

Statistics Norway - Research Department ( email )

Kongens Gt. 6
PO Box 8131 Dep
N-0033 Oslo
Norway

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