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When do Firms Break the Law in Order to Reduce Marginal Cost? - An Application to the Problem of Environmental Inspection

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Author Info

  • Häckner, Jonas

    ()
    (Dept. of Economics, Stockholm University)

  • Herzing, Mathias

    ()
    (Dept. of Economics, Stockholm University)

Abstract

This study attempts to identify firm characteristics that are important in determining whether or not a specific firm has strong incentives for non-compliance with environmental laws. In particular, we analyze how these incentives are related to the size of the cost reductions associated with non-compliance, business cycle conditions, the degree of product differentiation, market structure, and price versus quantity competition. When cost reductions are non-dramatic, in the sense that they do not lead to monopoly, the following rules of thumb are suggested. 1) Inspection should be intensified during booms, 2) firms that face high costs of compliance should be inspected more intensely and 3)firms that are insulated from competition by product differentiation or by lack of competitors should be inspected more intensely. Although our prime focus is environmental inspection, the theoretical findings readily extends to other similar applications such as VAT fraud and violations against import restrictions. They can also have some bearing on the monitoring of financial markets that are subject to regulation.

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Bibliographic Info

Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2012:11.

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Length: 45 pages
Date of creation: 20 Sep 2012
Date of revision:
Handle: RePEc:hhs:sunrpe:2012_0011

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Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
Phone: +46 8 16 20 00
Fax: +46 8 16 14 25
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Web page: http://www.ne.su.se/
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Related research

Keywords: Environmental Inspection; Market Structure; Product Differentiation; Bertrand; Cournot;

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  1. Selden Thomas M. & Terrones Marco E., 1993. "Environmental Legislation and Enforcement: A Voting Model under Asymmetric Information," Journal of Environmental Economics and Management, Elsevier, vol. 24(3), pages 212-228, May.
  2. Philippe Bontems & Gilles Rotillon, 2000. "Honesty in Environmental Compliance Games," European Journal of Law and Economics, Springer, vol. 10(1), pages 31-41, July.
  3. Heyes, Anthony G., 1996. "Cutting environmental penalties to protect the environment," Journal of Public Economics, Elsevier, vol. 60(2), pages 251-265, May.
  4. Devon Garvie & Andrew Keeler, 1993. "Incomplete Enforcement with Endogenous Regulatory Choice," Working Papers 873, Queen's University, Department of Economics.
  5. Heyes, Anthony & Rickman, Neil, 1999. "Regulatory dealing - revisiting the Harrington paradox," Journal of Public Economics, Elsevier, vol. 72(3), pages 361-378, June.
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