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The Value of Regulatory Discretion: Estimates From Environmental Inspections in India

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  • Esther Duflo
  • Michael Greenstone
  • Rohini Pande
  • Nicholas Ryan

Abstract

High pollution persists in many developing countries despite strict environmental rules. We use a field experiment and a structural model to study how plant emission standards are enforced. In collaboration with an Indian environmental regulator, we experimentally doubled the rate of inspection for treatment plants and required that the extra inspections be assigned randomly. We find that treatment plants only slightly increased compliance. We hypothesize that this weak effect is due to poor targeting, since the random inspections in the treatment found fewer extreme violators than the regulator's own discretionary inspections. To unbundle the roles of extra inspections and the removal of discretion over what plants to target, we set out a model of environmental regulation where the regulator targets inspections, based on a signal of pollution, to maximize plant abatement. Using the experiment to identify key parameters of the model, we find that the regulator aggressively targets its discretionary inspections, to the degree that half of the plants receive fewer than one inspection per year, while plants expected to be the dirtiest may receive ten. Counterfactual simulations show that discretion in targeting helps enforcement: inspections that the regulator assigns cause three times more abatement than would the same number of randomly assigned inspections. Nonetheless, we find that the regulator's information on plant pollution is poor, and improvements in monitoring would reduce emissions.

Suggested Citation

  • Esther Duflo & Michael Greenstone & Rohini Pande & Nicholas Ryan, 2018. "The Value of Regulatory Discretion: Estimates From Environmental Inspections in India," Econometrica, Econometric Society, vol. 86(6), pages 2123-2160, November.
  • Handle: RePEc:wly:emetrp:v:86:y:2018:i:6:p:2123-2160
    DOI: 10.3982/ECTA12876
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Makofske, Matthew Philip, 2019. "Inspection regimes and regulatory compliance: How important is the element of surprise?," Economics Letters, Elsevier, vol. 177(C), pages 30-34.
    2. Gerardino, Maria Paula & Litschig, Stephan & Pomeranz, Dina, 2017. "Can Audits Backfire? Evidence from Public Procurement in Chile," CEPR Discussion Papers 12529, C.E.P.R. Discussion Papers.
    3. Timothy B. Armstrong & Michal Kolesár, 2018. "Sensitivity Analysis using Approximate Moment Condition Models," Cowles Foundation Discussion Papers 2158R, Cowles Foundation for Research in Economics, Yale University, revised Feb 2019.
    4. Zhang, Bing & Chen, Xiaolan & Guo, Huanxiu, 2018. "Does central supervision enhance local environmental enforcement? Quasi-experimental evidence from China," Journal of Public Economics, Elsevier, vol. 164(C), pages 70-90.
    5. Isaiah Andrews & Toru Kitagawa & Adam McCloskey, 2018. "Inference on winners," CeMMAP working papers CWP31/18, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    6. Christopher Hansman & Jonas Hjort & Gianmarco León, 2019. "Interlinked firms and the consequences of piecemeal regulation," Journal of the European Economic Association, European Economic Association, vol. 17(3), pages 876-916.
    7. Banerjee, Abhijit & Duflo, Esther & Imbert, Clement & Mathew, Santosh & Pande, Rohini, 2016. "E-Governance, Accountability, and Leakage in Public Programs: Experimental Evidence from a Financial Management Reform in India," Working Paper Series rwp16-056, Harvard University, John F. Kennedy School of Government.
    8. Ali, Saleem H., 2020. "Environmental urgency versus the allure of RCT empiricism," World Development, Elsevier, vol. 127(C).
    9. Christopher Hansman & Jonas Hjort & Gianmarco León, 2015. "Firm's response and unintended health consequences of industrial regulations," Economics Working Papers 1469, Department of Economics and Business, Universitat Pompeu Fabra.
    10. Pedro Naso, 2019. "Environmental Regulation in a Transitional Political System: Delegation of Regulation and Perceived Corruption in South Africa," CIES Research Paper series 59-2019, Centre for International Environmental Studies, The Graduate Institute.

    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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