The influence of financial status on the effectiveness of environmental enforcement
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- A. Mitchell Polinsky & Steven Shavell, 1999.
"The Economic Theory of Public Enforcement of Law,"
NBER Working Papers
6993, National Bureau of Economic Research, Inc.
- Shimshack, Jay P. & Ward, Michael B., 2005.
"Regulator reputation, enforcement, and environmental compliance,"
Journal of Environmental Economics and Management,
Elsevier, vol. 50(3), pages 519-540, November.
- Shimshack, Jay P. & Ward, Michael B., 2005. "Regulator reputation, enforcement, and environmental compliance," MPRA Paper 25994, University Library of Munich, Germany.
- Wayne B. Gray & Carol Adaire Jones, 1990.
"Are OSHA Health Inspections Effective? A Longitudinal Study in the Manufacturing Sector,"
NBER Working Papers
3233, National Bureau of Economic Research, Inc.
- Gray, Wayne B & Jones, Carol Adaire, 1991. "Are OSHA Health Inspections Effective? A Longitudinal Study in the Manufacturing Sector," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 504-08, August.
- Bandyopadhyay Sushenjit & Horowitz John, 2006. "Do Plants Overcomply with Water Pollution Regulations? The Role of Discharge Variability," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(1), pages 1-32, January.
- Golbe, Devra L, 1986. "Safety and Profits in the Airline Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 34(3), pages 305-18, March.
- Heckman, James J, 1979.
"Sample Selection Bias as a Specification Error,"
Econometric Society, vol. 47(1), pages 153-61, January.
- Dionne, G. & Gagne, R. & Gagnon, F. & Vanasse, C., 1993.
"Debt, Moral Hazard and Airline Safety : An Empirical Evidence,"
Cahiers de recherche
9309, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Dionne, Georges & Gagne, Robert & Gagnon, Francois & Vanasse, Charles, 1997. "Debt, moral hazard and airline safety An empirical evidence," Journal of Econometrics, Elsevier, vol. 79(2), pages 379-402, August.
- Dionne, G. & Gagne, R. & Gagnon, F. & Vanasse, C., 1994. "Debts, moral hazard and airline safety : an empirica evidence," CEPREMAP Working Papers (Couverture Orange) 9419, CEPREMAP.
- James T. Hamilton, 1993. "Politics and Social Costs: Estimating the Impact of Collective Action on Hazardous Waste Facilities," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 101-125, Spring.
- Helland, Eric, 1998. "The Revealed Preferences of State EPAs: Stringency, Enforcement, and Substitution," Journal of Environmental Economics and Management, Elsevier, vol. 35(3), pages 242-261, May.
- Gary S. Becker, 1974.
"Crime and Punishment: An Economic Approach,"
in: Essays in the Economics of Crime and Punishment, pages 1-54
National Bureau of Economic Research, Inc.
- Eckert, Heather, 2004. "Inspections, warnings, and compliance: the case of petroleum storage regulation," Journal of Environmental Economics and Management, Elsevier, vol. 47(2), pages 232-259, March.
- Wayne B. Gray & Carol Adaire Jones, 1991. "Longitudinal Patterns of Compliance with Occupational Safety and Health Administration Health and Safety Regulations in the Manufacturing Sector," Journal of Human Resources, University of Wisconsin Press, vol. 26(4), pages 623-653.
- T. Randolph Beard, 1990. "Bankruptcy and Care Choice," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 626-634, Winter.
- Earnhart, Dietrich, 2004. "Regulatory factors shaping environmental performance at publicly-owned treatment plants," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 655-681, July.
- Epple, Dennis & Visscher, Michael, 1984. "Environmental Pollution: Modeling Occurrence, Detection, and Deterrence," Journal of Law and Economics, University of Chicago Press, vol. 27(1), pages 29-60, April.
- Anton, W.R.Q.Wilma Rose Q. & Deltas, George & Khanna, Madhu, 2004.
"Incentives for environmental self-regulation and implications for environmental performance,"
Journal of Environmental Economics and Management,
Elsevier, vol. 48(1), pages 632-654, July.
- Anton, Wilma Rose Q. & Deltas, George & Khanna, Madhu, 2002. "Incentives for Environmental Self-Regulation and Implications for Environmental Performance," Working Papers 02-0120, University of Illinois at Urbana-Champaign, College of Business.
- Dietrich Earnhart, 2004. "Panel Data Analysis of Regulatory Factors Shaping Environmental Performance," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 391-401, February.
- Dietrich Earnhart, 2004. "The Effects of Community Characteristics on Polluter Compliance Levels," Land Economics, University of Wisconsin Press, vol. 80(3), pages 408-432.
- Jay P. Shimshack & Michael B. Ward, 2007.
"Enforcement and Over-Compliance,"
Discussion Papers Series, Department of Economics, Tufts University
0706, Department of Economics, Tufts University.
- Nadeau, Louis W., 1997. "EPA Effectiveness at Reducing the Duration of Plant-Level Noncompliance," Journal of Environmental Economics and Management, Elsevier, vol. 34(1), pages 54-78, September.
- Golbe, Devra L, 1983. "Product Safety in a Regulated Industry: Evidence from the Railroads," Economic Inquiry, Western Economic Association International, vol. 21(1), pages 39-52, January.
- Eric Helland, 1998. "The Enforcement Of Pollution Control Laws: Inspections, Violations, And Self-Reporting," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 141-153, February.
- Leigh J. Maynard & James S. Shortle, 2001. "Determinants of Cleaner Technology Investments in the U.S. Bleached Kraft Pulp Industry," Land Economics, University of Wisconsin Press, vol. 77(4), pages 561-576.
- A. Colin Cameron & Pravin K. Trivedi, 2010. "Microeconometrics Using Stata, Revised Edition," Stata Press books, StataCorp LP, number musr, November.
- Laplante, Benoit & Rilstone, Paul, 1996. "Environmental Inspections and Emissions of the Pulp and Paper Industry in Quebec," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 19-36, July.
- Randall K. Filer & Devra L. Golbe, 2003. "Debt, Operating Margin, and Investment In Workplace Safety," Journal of Industrial Economics, Wiley Blackwell, vol. 51(3), pages 359-381, 09.
- Scholz, John T & Gray, Wayne B, 1990. " OSHA Enforcement and Workplace Injuries: A Behavioral Approach to Risk Assessment," Journal of Risk and Uncertainty, Springer, vol. 3(3), pages 283-305, September.
- Gray, Wayne B. & Deily, Mary E., 1996. "Compliance and Enforcement: Air Pollution Regulation in the U.S. Steel Industry," Journal of Environmental Economics and Management, Elsevier, vol. 31(1), pages 96-111, July.
- Eric E. Anderson & Wayne K. Talley, 1995. "The Oil Spill Size of Tanker and Barge Accidents: Determinants and Policy Implications," Land Economics, University of Wisconsin Press, vol. 71(2), pages 216-228.
When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:96:y:2012:i:9:p:670-684. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.