How Does the Deterrence Effect of Regulatory Enforcement Differ Between Privately and Government-Owned Facilities?

Environmental protection laws apply to both privately owned and government-owned facilities. Regulatory agencies take actions against facilities to induce compliance. Privately owned and government-owned facilities’ responses to enforcement may differ because of differences in objective functions, constraints, and incentives. We ask: do privately owned facilities and government-owned facilities respond differently to inspections and enforcement actions? We answer this question in the context of the U.S. Clean Water Act. Our analysis exploits monthly data that cover major facilities in all sectors within six U.S. states, comprising over one-third of all the major facilities operating in the U.S., from 1997 to 2016. We distinguish between government-owned municipal wastewater facilities, i.e., publicly owned treatment works (POTWs), and other government-owned facilities, e.g., hospitals, power plants. We find that, conditioning on past violations, POTW facilities receive more regulatory enforcement than privately owned facilities, although this may not be driven solely by ownership type. On the other hand, non-POTW government-owned facilities receive less. More importantly, while we find no significant evidence of a deterrence effect of enforcement actions for privately owned facilities, both kinds of government-owned facilities show evidence of deterrence. Thus, in this context, enforcement against government-owned facilities is in some cases at least as strong as enforcement against privately owned facilities, and elicits a stronger deterrence response.