We analyze the regulation of false statements in the presence of Bayesian audiences. We find that: (a) Often, moderate sanctions are optimal even though strict sanctions can fully deter all false statements; (b) the existence of separating equilibria—where only truthful statements are...

This article shows that moderate regulatory sanctions can generate subtle problems not apparent in simple enforcement models. Assuming that firms may ultimately face different noncompliance detection probabilities, we highlight that moderate sanctions may conflict with aspects of both static and...