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Uncertain penalties and compliance: experimental evidence

Author

Listed:
  • Carol Luengo

    (Universidad de Concepción)

  • Marcelo Caffera

    (Universidad de Montevideo)

  • Carlos Chávez

    (Universidad de Talca
    Interdisciplinary Center for Aquaculture Research (INCAR))

Abstract

We present the results of a series of economic laboratory experiments designed to study the compliance behavior of polluting firms when penalties are stochastic. The experiments consist of a regulatory environment in which university students faced emission standards and an enforcement mechanism composed of audit probabilities and penalties (conditional on detection of a violation). We examine how uncertainty about the penalty affects the compliance decision and the extent of violation with two levels of enforcement: one in which the regulator induces perfect compliance and another one in which it does not. Our results suggest that in the first case, uncertain penalties increase the extent of violations in firms with higher marginal benefits. When enforcement is not sufficient to induce compliance, the uncertain penalties do not have any statistically significant effect on compliance behavior. Overall, the results suggest that a cost-effective design of emission standards should include complete, public information on the penalties for violations.

Suggested Citation

  • Carol Luengo & Marcelo Caffera & Carlos Chávez, 2020. "Uncertain penalties and compliance: experimental evidence," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 22(2), pages 197-216, April.
    • Handle: RePEc:spr:envpol:v:22:y:2020:i:2:d:10.1007_s10018-019-00255-5
    DOI: 10.1007/s10018-019-00255-5
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    References listed on IDEAS

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    2. Herzing, Mathias, 2021. "Multiple equilibria in the context of inspection probabilities depending on firms’ relative emissions," Resource and Energy Economics, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Uncertainty; Penalty; Emission standard; Economic experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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