Regulatory Enforcement with Discretionary Fining and Litigation

In this paper, we focus on the determination of the optimal fine set by a regulator when a firm can litigate to avoid paying the fine and the monitoring agency has discretionary power to negotiate with the firm the size of the fine. The regulator needs to balance the positive effect of the fines size on the degree of non-compliance and the possibility of litigation if the fine is too high. We find that the optimal fine is not necessarily set at its maximum level