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 brings no 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.