Sanctions, Now or Later? The Optimal use of Warnings in Law Enforcement

Despite strict penalties may be available in order to prosecute violators, regulators frequently just issue a warning of some kind, and if violators move into compliance they do net release any penalty. Example of this practice may be found in several countries and for several different situations, the most common regard traffic law, environmental regulation and financial crimes. This paper defines the optimal sanctioning strategy for an enforcer that minimizes the social cost of violations and can determine the auditing probability and whether to sanction violators immediately or issue a warning and sanctioning only repeat offenders. We show that it may be desirable to procrastinate the sanctions by issuing a warning to the violators and sanction only those who result to be guilty at a second audit. Furthermore, we show that when the potential wrongdoers are uncertain about the auditing parameters the optimal probability of auditing is higher than in the case there is not such an uncertainty. The optimality of issuing a warning is related to the optimal monitoring probability.