Formal and Informal Regulation of Industrial Pollution: Comparative Evidence from Indonesia and the United States

Economic theory and recent empirical work suggest that when formal regulation of pollution is absent or less than 100 percent effective, affected communities are often able to negotiate abatement from plants in their vicinity through "informal regulation. Using a model of equilibrium pollution, this article confirms the existence of significant informal regulation for unregulated pollutants in both Indonesia and the United States as well as for regulated pollutants in the United States. Combining plant-level data with community data in both countries, regressions reveal that even after controlling for traditional economic variables such as output levels and input prices as well as for plant characteristics such as industrial sector and age, the per capita income of affected communities significantly affects pollution intensities. Higher-income communities win significantly lower emissions in both countries and for both unregulated and regulated pollutants in the United States, presumably because income affects both preferences for environmental quality and the ability to bring pressure on polluting factories. Copyright 1997 by Oxford University Press.