Reputation effects in regulatory enforcement

We show that, under plausible hypotheses, an enforcement agency without commitment power will not undertake any enforcement effort at all in a static game. Indeed, punishment of noncompliant agents does not necessarily bring social benefits in itself. In a dynamic framework, however, the enforcement agency might inspect private agents in order to develop a reputation that it will inspect in the future. However small the private agents ’ prior beliefs that they will be inspected, the agency can obtain almost perfect compliance if the game lasts long enough. Our model with reputation effects does however not converge to a model with perfect commitment. 1