IDEAS home Printed from https://ideas.repec.org/p/hhs/sunrpe/2012_0011.html
   My bibliography  Save this paper

When do Firms Break the Law in Order to Reduce Marginal Cost? - An Application to the Problem of Environmental Inspection

Author

Listed:

Abstract

This study attempts to identify firm characteristics that are important in determining whether or not a specific firm has strong incentives for non-compliance with environmental laws. In particular, we analyze how these incentives are related to the size of the cost reductions associated with non-compliance, business cycle conditions, the degree of product differentiation, market structure, and price versus quantity competition. When cost reductions are non-dramatic, in the sense that they do not lead to monopoly, the following rules of thumb are suggested. 1) Inspection should be intensified during booms, 2) firms that face high costs of compliance should be inspected more intensely and 3)firms that are insulated from competition by product differentiation or by lack of competitors should be inspected more intensely. Although our prime focus is environmental inspection, the theoretical findings readily extends to other similar applications such as VAT fraud and violations against import restrictions. They can also have some bearing on the monitoring of financial markets that are subject to regulation.

Suggested Citation

  • Häckner, Jonas & Herzing, Mathias, 2012. "When do Firms Break the Law in Order to Reduce Marginal Cost? - An Application to the Problem of Environmental Inspection," Research Papers in Economics 2012:11, Stockholm University, Department of Economics.
  • Handle: RePEc:hhs:sunrpe:2012_0011
    as

    Download full text from publisher

    File URL: http://www2.ne.su.se/paper/wp12_11.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Heyes, Anthony G., 1996. "Cutting environmental penalties to protect the environment," Journal of Public Economics, Elsevier, vol. 60(2), pages 251-265, May.
    2. Selden Thomas M. & Terrones Marco E., 1993. "Environmental Legislation and Enforcement: A Voting Model under Asymmetric Information," Journal of Environmental Economics and Management, Elsevier, vol. 24(3), pages 212-228, May.
    3. Heyes, Anthony & Rickman, Neil, 1999. "Regulatory dealing - revisiting the Harrington paradox," Journal of Public Economics, Elsevier, vol. 72(3), pages 361-378, June.
    4. Garvie, Devon & Keeler, Andrew, 1994. "Incomplete enforcement with endogenous regulatory choice," Journal of Public Economics, Elsevier, vol. 55(1), pages 141-162, September.
    5. Philippe Bontems & Gilles Rotillon, 2000. "Honesty in Environmental Compliance Games," European Journal of Law and Economics, Springer, vol. 10(1), pages 31-41, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Häckner, Jonas & Herzing, Mathias, 2017. "The effectiveness of environmental inspections in oligopolistic markets," Resource and Energy Economics, Elsevier, vol. 48(C), pages 83-97.
    2. Häckner, Jonas & Herzing, Mathias, 2020. "The equilibrium compliance rate among regulated firms," International Review of Law and Economics, Elsevier, vol. 63(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Timo Goeschl & Ole Jürgens, 2014. "Criminalizing environmental offences: when the prosecutor’s helping hand hurts," European Journal of Law and Economics, Springer, vol. 37(2), pages 199-219, April.
    2. Chongwoo Choe & Iain Fraser, 1999. "Compliance Monitoring and Agri‐Environmental Policy," Journal of Agricultural Economics, Wiley Blackwell, vol. 50(3), pages 468-487, September.
    3. Hsiao-Chi Chen & Shi-Miin Liu, 2005. "Tradeable-permit pollution control systems with and without commitment to auditing," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 7(1), pages 15-37, March.
    4. Nyborg, Karine & Telle, Kjetil, 2004. "The role of warnings in regulation: keeping control with less punishment," Journal of Public Economics, Elsevier, vol. 88(12), pages 2801-2816, December.
    5. Heyes, Anthony & Doucet, Joseph, 1997. "2-Stage Enforcement and Regulatory Polarisation: a Simple Model with Application to the USEPA," Cahiers de recherche 9717, Université Laval - Département d'économique.
    6. Oestreich, Andreas Marcel, 2017. "On optimal audit mechanisms for environmental taxes," Journal of Environmental Economics and Management, Elsevier, vol. 84(C), pages 62-83.
    7. Marcello Basili & Filippo Belloc & Simona Benedettini & Antonio Nicita, 2012. "Warning, Learning and Compliance: Evidence from Micro-data on Driving Behavior," Department of Economics University of Siena 639, Department of Economics, University of Siena.
    8. Decker, Christopher S. & Pope, Christopher R., 2005. "Adherence to environmental law: the strategic complementarities of compliance decisions," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(4-5), pages 641-661, September.
    9. Jessica Coria & Xiao-Bing Zhang, 2015. "State-Dependent Enforcement to Foster the Adoption of New Technologies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(2), pages 359-381, October.
    10. Nyborg, Karine & Telle, Kjetil, 2004. "A dissolving paradox: Firms’ compliance to environmental regulation," Memorandum 02/2004, Oslo University, Department of Economics.
    11. Jessica Coria & Clara Villegas-Palacio, 2014. "Regulatory Dealing: Technology Adoption Versus Enforcement Stringency Of Emission Taxes," Contemporary Economic Policy, Western Economic Association International, vol. 32(2), pages 451-473, April.
    12. Arun Malik, 2014. "The Desirability of forgiveness in regulatory enforcement," Journal of Regulatory Economics, Springer, vol. 46(1), pages 1-22, August.
    13. Coria, Jessica & Zhang, Xiao-Bing, 2015. "The Harrington Paradox Squared," Working Papers in Economics 608, University of Gothenburg, Department of Economics.
    14. Arun Malik, 2008. "The Desirability of Forgiveness in Regulatory Enforcement," Working Papers 2008-14, The George Washington University, Institute for International Economic Policy.
    15. Takayoshi Shinkuma & Shunsuke Managi, 2012. "Effectiveness of policy against illegal disposal of waste," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 14(2), pages 123-145, April.
    16. Anthony Heyes & Andreas Marcel Oestreich, 2018. "A theory of social license when regulatory pressure is jointly produced by an EPA and an NGO," Journal of Regulatory Economics, Springer, vol. 54(3), pages 219-243, December.
    17. Nakashima, Kiyotaka & Ogawa, Toshiaki, 2020. "The Impacts of Strengthening Regulatory Surveillance on Bank Behavior: A Dynamic Analysis from Incomplete to Complete Enforcement of Capital Regulation in Microprudential Policy," MPRA Paper 99938, University Library of Munich, Germany.
    18. Inés Macho-Stadler, 2008. "Environmental regulation: choice of instruments under imperfect compliance," Spanish Economic Review, Springer;Spanish Economic Association, vol. 10(1), pages 1-21, March.
    19. Magnus Söderberg, 2008. "Uncertainty and regulatory outcome in the Swedish electricity distribution sector," European Journal of Law and Economics, Springer, vol. 25(1), pages 79-94, February.
    20. Sandra Rousseau, 2007. "Timing of environmental inspections: survival of the compliant," Journal of Regulatory Economics, Springer, vol. 32(1), pages 17-36, August.

    More about this item

    Keywords

    Environmental Inspection; Market Structure; Product Differentiation; Bertrand; Cournot;
    All these keywords.

    JEL classification:

    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:sunrpe:2012_0011. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne Jensen). General contact details of provider: https://edirc.repec.org/data/neisuse.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.