The use of warnings in the presence of errors

This article studies the effects of warnings, an enforcement instrument which is often used by environmental inspection agencies. Due to regulatory errors, measured emissions are uncertain and some firms are unjustly penalized. Warnings can then be used as a means to reduce the consequences of these errors. Even though the presence of warnings creates some underdeterrence of medium-cost firms, such a system reduces the overcompliance of low-cost firms caused by the uncertainty surrounding measured emissions. Further, warnings reduce the number of incorrect prosecutions in the case of measurement errors, which is also welfare enhancing, albeit at the cost of increasing the number of violators that go unpunished. For small error sizes, the use of warnings is shown to be welfare improving compared to only using fines.