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Multiple equilibria in the context of inspection probabilities depending on firms’ relative emissions

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  • Herzing, Mathias

Abstract

This paper presents a model of environmental regulations with firms that are heterogeneous with respect to the cost for reducing emissions to the legally permitted level. Given that the enforcement capacity is limited due to budgetary constraints and that each firm's inspection probability depends on its emissions relative to other firms’ emissions, the likelihood of being punished for violations is endogenously determined and multiple equilibria may therefore arise. Hence, both good outcomes with high compliance rates and bad outcomes with many violations are possible. Multiple equilibria are most likely to emerge at intermediate levels of deterrence and at low permitted emission levels. However, it is generally not straightforward how stricter legislation impacts on equilibrium outcomes, indicating that behavioral expectations among regulated firms are an important factor to consider when adapting enforcement to changes in the law.

Suggested Citation

  • Herzing, Mathias, 2021. "Multiple equilibria in the context of inspection probabilities depending on firms’ relative emissions," Resource and Energy Economics, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:resene:v:63:y:2021:i:c:s0928765520304139
    DOI: 10.1016/j.reseneeco.2020.101204
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    References listed on IDEAS

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    More about this item

    Keywords

    Environmental regulation; Emissions; Compliance; Asymmetric information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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