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The influence of financial status on the effectiveness of environmental enforcement

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  • Earnhart, Dietrich
  • Segerson, Kathleen

Abstract

This paper analyzes the influence of financial status on the effectiveness of environmental enforcement. It considers multiple dimensions of both enforcement and financial status. Regarding enforcement, the paper considers both the likelihood of enforcement, as captured by the likelihood of inspections conducted at regulated facilities, and the severity of enforcement, as captured by the size of sanctions imposed on polluting facilities found violating their effluent limits. As indicators of corporate financial status, the paper considers measures of liquidity, solvency, and profitability [a proxy for corporate managerial skill], all of which can influence the likelihood that a firm faces liquidity and/or bankruptcy constraints. The paper first develops a theoretical model of optimal abatement in the presence of liquidity and bankruptcy constraints and uses the model to investigate the impact of financial status on optimal abatement and the effectiveness of enforcement. Then the paper empirically examines the interactions between enforcement and financial status using data on wastewater discharges from US chemical manufacturing facilities for the years 1995 to 2001. Empirical results suggest that the financial status dimensions considered here in general play an important role in determining the incentives created by enforcement. As the most striking result, we show theoretically and empirically that, when financial dimensions are included in the analysis, the conventional wisdom regarding the effect of enforcement likelihood on abatement no longer holds, i.e., increased enforcement can actually lead to worse environmental performance.

Suggested Citation

  • Earnhart, Dietrich & Segerson, Kathleen, 2012. "The influence of financial status on the effectiveness of environmental enforcement," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 670-684.
  • Handle: RePEc:eee:pubeco:v:96:y:2012:i:9:p:670-684
    DOI: 10.1016/j.jpubeco.2012.05.002
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. repec:eee:ecolec:v:142:y:2017:i:c:p:282-294 is not listed on IDEAS
    2. Earnhart, Dietrich & Harrington, Donna Ramirez, 2014. "Effect of audits on the extent of compliance with wastewater discharge limits," Journal of Environmental Economics and Management, Elsevier, vol. 68(2), pages 243-261.
    3. Peter Maniloff, 2016. "Bayesian Learning and Regulatory Deterrence: Evidence from Oil and Gas Production," Working Papers 2016-04, Colorado School of Mines, Division of Economics and Business.
    4. Alm, James & Shimshack, Jay, 2014. "Environmental Enforcement and Compliance: Lessons from Pollution, Safety, and Tax Settings," Foundations and Trends(R) in Microeconomics, now publishers, vol. 10(4), pages 209-274, December.
    5. Dietrich Earnhart & Dylan G. Rassier, 2016. "“Effective regulatory stringency” and firms’ profitability: the effects of effluent limits and government monitoring," Journal of Regulatory Economics, Springer, vol. 50(2), pages 111-145, October.
    6. Romero Rocha & Juliano Assunção & Clarissa Gandou, 2014. "Amazon Monitoring And Deforestation Slowdown: The Priority Municipalities," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41st Brazilian Economics Meeting] 197, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    7. Andersen, Dana C., 2017. "Default Risk, Productivity, and the Environment: Theory and Evidence from U.S. Manufacturing," Working Papers 2017-8, University of Alberta, Department of Economics.
    8. repec:eee:jeeman:v:84:y:2017:i:c:p:189-208 is not listed on IDEAS
    9. Ben White, 2015. "Do control rights determine the optimal extension of liability to investors? The case of environmental policy for mines," Journal of Regulatory Economics, Springer, vol. 48(1), pages 26-52, August.

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