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Enforcement Leverage with Fixed Inspection Capacity

  • Liu, Lirong
  • Neilson, William

We develop a targeting enforcement mechanism in the context of fixed inspection capacity due to budget constraint. A fixed number of firms are selected for inspection and those with the highest emissions are targeted with higher inspection probability. This structure induces dynamic rank-order tournaments among inspected firms. The differentiated inspection probabilities between targeted and untargeted firms induces leverage effects while the rank-order tournament induces competition effect. The combinations of leverage and competition effects give firms more incentive to abate and stay in compliance. We use numerical simulations to show that targeted firms should be inspected with high probability and that about 2/3 of inspections should be allocated to targeted firms. Furthermore, even suboptimal allocations of inspections and firms to the targeted and untargeted groups can out-perform static enforcement schemes.

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File URL: http://dx.doi.org/10.1561/102.00000034
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Article provided by now publishers in its journal Strategic Behavior and the Environment.

Volume (Year): 3 (2013)
Issue (Month): 4 (August)
Pages: 305-328

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Handle: RePEc:now:jnlsbe:102.00000034
Contact details of provider: Web page: http://www.nowpublishers.com/

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  1. Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October.
  2. Laurent Franckx & Isabelle Brose & Alessio DAmato, 2004. "Multitask Rank Order Tournaments," Economics Bulletin, AccessEcon, vol. 10(10), pages 1-10.
  3. Raymond, Mark, 1999. "Enforcement leverage when penalties are restricted: a reconsideration under asymmetric information," Journal of Public Economics, Elsevier, vol. 73(2), pages 289-295, August.
  4. Scott M. Gilpatric & Christian A. Vossler & Michael McKee, 2011. "Regulatory enforcement with competitive endogenous audit mechanisms," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 292-312, 06.
  5. Lars Hansen & Frank Jensen & Linda Nøstbakken, 2014. "Quota Enforcement in Resource Industries: Self-Reporting and Differentiated Inspections," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 58(4), pages 539-562, August.
  6. Friesen, Lana, 2001. "Targeting Enforcement to Improve Compliance with Environmental Regulations," 2001 Conference (45th), January 23-25, 2001, Adelaide 125634, Australian Agricultural and Resource Economics Society.
  7. 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.
  8. Alm, James & McKee, Michael, 2004. "Tax compliance as a coordination game," Journal of Economic Behavior & Organization, Elsevier, vol. 54(3), pages 297-312, July.
  9. Sarah L. Stafford, 2008. "Self-Policing in a Targeted Enforcement Regime," Southern Economic Journal, Southern Economic Association, vol. 74(4), pages 934-951, April.
  10. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  11. Harford, Jon D. & Harrington, Winston, 1991. "A reconsideration of enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 45(3), pages 391-395, August.
  12. Harford, Jon D., 1991. "Measurement error and state-dependent pollution control enforcement," Journal of Environmental Economics and Management, Elsevier, vol. 21(1), pages 67-81, July.
  13. Barry J. Nalebuff & Joseph E. Stiglitz, 1983. "Prices and Incentives: Towards a General Theory of Compensation and Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 21-43, Spring.
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