Joint with: Doron Klunover
Abstract: We consider a model in which a regulator determines the level of an activity—which is harmful to society—beyond which an agent will pay a fixed fine. The agent then chooses his level of activity accordingly. The agent has private information about the utility he gains from the activity, such that it is only publicly known that his utility is increasing in the level of the activity. We show that the regulator should adopt a random punishment scheme
under certain condition in order to minimize harm. The results may help to solve the puzzle of why vague enforcement policies are implemented by competent governments even when tough enforcement is possible and costless.
Last Updated Date : 04/03/2021