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Environmental enforcement when ‘inspectability’ is endogenous: A model with overshooting properties

  • Anthony Heyes

If a firm can influence its monitorability vis-à-vis an environmental regulator, it is shown that increasing the thoroughness of inspections induces the firm to substitute towards more transparent technologies, whilst increasing their frequency may cause substitution the other way. Perversely, when the effect of such substitution is taken into account, an increase in the frequency of inspections (or, equally, the stringency of penalties) may worsen the firm's environmental performance. The agency should favour more thorough inspections than existing theory suggests, particularly in sectors where the scope for such substitution is great. Moreover, when monitorability adjusts only sluggishly to policy shocks (because it is an embodied characteristic of capital, for example) the environmental impacts of increased frequency and increased thoroughness well over- and under-shoot their respective long-run impacts. In assessing regulatory reform, therefore, it is important to leave sufficient time for the class of adjustments identified to occur. The possibility of overshooting can be used as an alternative to existing ‘regulatory capture’ theories to explain why the efficacy of some classes of regulatory reform may fade through time. Copyright Kluwer Academic Publishers 1994

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Article provided by European Association of Environmental and Resource Economists in its journal Environmental & Resource Economics.

Volume (Year): 4 (1994)
Issue (Month): 5 (October)
Pages: 479-494

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Handle: RePEc:kap:enreec:v:4:y:1994:i:5:p:479-494
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  1. Richard A. Posner, 1974. "Theories of Economic Regulation," NBER Working Papers 0041, National Bureau of Economic Research, Inc.
  2. Kalt, Joseph P & Zupan, Mark A, 1984. "Capture and Ideology in the Economic Theory of Politics," American Economic Review, American Economic Association, vol. 74(3), pages 279-300, June.
  3. Devon Garvie & Andrew Keeler, 1993. "Incomplete Enforcement with Endogenous Regulatory Choice," Working Papers 873, Queen's University, Department of Economics.
  4. Linder, Stephen H. & McBride, Mark E., 1984. "Enforcement costs and regulatory reform: The agency and firm response," Journal of Environmental Economics and Management, Elsevier, vol. 11(4), pages 327-346, December.
  5. Miceli, Thomas J, 1990. "Optimal Prosecution of Defendants Whose Guilt Is Uncertain," Journal of Law, Economics and Organization, Oxford University Press, vol. 6(1), pages 189-201, Spring.
  6. Carol Adaire Jones, 1989. "Standard setting with incomplete enforcement revisited," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 8(1), pages 72-87.
  7. Shaffer, Sherrill, 1990. "Regulatory Compliance with Nonlinear Penalties," Journal of Regulatory Economics, Springer, vol. 2(1), pages 99-103, March.
  8. Segerson, Kathleen, 1988. "Uncertainty and incentives for nonpoint pollution control," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 87-98, March.
  9. Storey, D J & McCabe, P J, 1980. "The Criminal Waste Discharger," Scottish Journal of Political Economy, Scottish Economic Society, vol. 27(1), pages 30-40, February.
  10. Bebchuk, Lucian Arye & Kaplow, Louis, 1993. "Optimal sanctions and differences in individuals' likelihood of avoiding detection," International Review of Law and Economics, Elsevier, vol. 13(2), pages 217-224, June.
  11. Harford, Jon D., 1987. "Self-reporting of pollution and the firm's behavior under imperfectly enforceable regulations," Journal of Environmental Economics and Management, Elsevier, vol. 14(3), pages 293-303, September.
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