Setting standards for credible compliance and law enforcement

In this paper we examine the setting of optimal legal standards to simultan eously induce parties to invest in care and to motivate law enforcers to de tect violators of the law. The strategic interaction between care providers and law enforcers determines the degree of efficiency achieved by the stan dards. Our principal finding is that some divergence between the marginal b enefits and marginal costs of providing care is required to control enforce ment costs. Further, the setting of standards may effectively substitute fo r the setting of fines when penalties for violation are fixed. In particula r, maximal fines may be welfare reducing when standards are set optimally.