When do Firms Break the Law in Order to Reduce Marginal Cost? - An Application to the Problem of Environmental Inspection
AbstractThis 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 InfoPaper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2012:11.
Length: 45 pages
Date of creation: 20 Sep 2012
Date of revision:
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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
Web page: http://www.ne.su.se/
More information through EDIRC
Environmental Inspection; Market Structure; Product Differentiation; Bertrand; Cournot;
Find related papers by JEL classification:
- K32 - Law and Economics - - Other Substantive Areas of Law - - - Environmental, Health, and Safety Law
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-30 (All new papers)
- NEP-ENV-2012-09-30 (Environmental Economics)
- NEP-IUE-2012-09-30 (Informal & Underground Economics)
- NEP-LAW-2012-09-30 (Law & Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Philippe Bontems & Gilles Rotillon, 2000. "Honesty in Environmental Compliance Games," European Journal of Law and Economics, Springer, vol. 10(1), pages 31-41, July.
- Devon Garvie & Andrew Keeler, 1993.
"Incomplete Enforcement with Endogenous Regulatory Choice,"
873, Queen's University, Department of Economics.
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- Heyes, Anthony G., 1996. "Cutting environmental penalties to protect the environment," Journal of Public Economics, Elsevier, vol. 60(2), pages 251-265, May.
- 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.
- 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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