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Honesty in a regulatory context - good thing or bad?

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  • Heyes, Anthony

Abstract

It is often taken for granted that if more firms were innately honest or ethical in the way they behaved, this would be a good thing. In this paper we use the example of environmental regulation to show that such a claim cannot, in general, be sustained. If regulation is by pollution tax we show that - once optimal agency response is taken into account - social welfare is non-monotonic in the proportion of firms that report emissions honestly. The choice of policy instrument may itself be characterised by 'reversals' with command-and-control methods being preferred for intermediate values of population honesty, a tax system being preferred at the extremes. This means that if - because of the spread of "ethical shareholding" or for whatever reason - the honesty of the corporate population increases through time, we should not be surprised to see at first a switch away from market-based instruments, and then a switch back. The model is argued to be consistent with a number of the stylised features of American regulatory history. It may also provide a defence of the USEPA's willingness to tolerate a 'distasteful culture of dishonesty' amongst those it is supposed to police (Yaeger [1991]). Though environmental regulation is used as an example for the purposes of exposition, the results are of more general interest.
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  • Heyes, Anthony, 2001. "Honesty in a regulatory context - good thing or bad?," European Economic Review, Elsevier, vol. 45(2), pages 215-232, February.
    • Handle: RePEc:eee:eecrev:v:45:y:2001:i:2:p:215-232
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    References listed on IDEAS

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    1. Heyes, Anthony G., 1996. "Cutting environmental penalties to protect the environment," Journal of Public Economics, Elsevier, vol. 60(2), pages 251-265, May.
    2. Nowell, Clifford & Shogren, Jason F, 1994. "Challenging the Enforcement of Environmental Regulation," Journal of Regulatory Economics, Springer, vol. 6(3), pages 265-282, September.
    3. Haltiwanger, John & Waldman, Michael, 1991. "Responders versus Non-responders: A New Perspective on Heterogeneity," Economic Journal, Royal Economic Society, vol. 101(408), pages 1085-1102, September.
    4. Xepapadeas, A. P., 1995. "Observability and choice of instrument mix in the control of externalities," Journal of Public Economics, Elsevier, vol. 56(3), pages 485-498, March.
    5. Magat, Wesley A & Viscusi, W Kip, 1990. "Effectiveness of the EPA's Regulatory Enforcement: The Case of Industrial Effluent Standards," Journal of Law and Economics, University of Chicago Press, vol. 33(2), pages 331-360, October.
    6. Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October.
    7. Brian Erard & Jonathan S. Feinstein, 1994. "Honesty and Evasion in the Tax Compliance Game," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 1-19, Spring.
    8. Heyes, Anthony G, 1998. "Making Things Stick: Enforcement and Compliance," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 14(4), pages 50-63, Winter.
    9. Gray, Wayne B. & Deily, Mary E., 1996. "Compliance and Enforcement: Air Pollution Regulation in the U.S. Steel Industry," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 96-111, July.
    10. Haltiwanger, John & Waldman, Michael, 1993. "The role of altruism in economic interaction," Journal of Economic Behavior & Organization, Elsevier, vol. 21(1), pages 1-15, May.
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    1. Heyes, Anthony & Kapur, Sandeep, 2009. "Enforcement missions: Targets vs budgets," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 129-140, September.
    2. Sverre Grepperud, 2007. "Environmental voluntary behaviour and crowding-out effects: regulation or laissez-faire?," European Journal of Law and Economics, Springer, vol. 23(2), pages 135-149, April.
    3. Heyes, Anthony & Kapur, Sandeep, 2009. "Enforcement missions: Targets vs budgets," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 129-140, September.

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