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2-Stage Enforcement and Regulatory Polarisation: a Simple Model with Application to the USEPA

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  • Heyes, Anthony
  • Doucet, Joseph

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Abstract

We present a simple, positive model in which regulatory enforcement is a 2-stage process. In the first stage firms are subject to random inspection. The inspection yields a noisy signal of the firm's true performance. Only if the signal exceeds some critical or "trigger" value is the firm subject to the second stage of enforcement, the audit. Analysis of the 2-stage process reveals some surprising comparative static results. The key result, referred to as regulatory polarisation, is the divergence of response to a tightening of the trigger. Specifically, while non-serious violators improve their performance as a result of a tighter trigger, the performance of serious violators degrades: The good get better whilst the bad get worse. The impact on total system performance is ambiguous and depends upon the initial distribution of firm types. We also analyse the implications of improvements in the accuracy of the inspection technology in such a model, arriving at some unconventional results. Whilst the model is motivated by institutional analysis of the USEPA it is argued to be applicable in a variety of other enforcement contexts.

Suggested Citation

  • 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.
  • Handle: RePEc:lvl:laeccr:9717
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    File URL: http://www.ecn.ulaval.ca/w3/recherche/cahiers/1997/97-04.pdf
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    References listed on IDEAS

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    1. Shaffer, Sherrill, 1990. "Regulatory Compliance with Nonlinear Penalties," Journal of Regulatory Economics, Springer, vol. 2(1), pages 99-103, March.
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    7. Heyes, Anthony G., 1996. "Cutting environmental penalties to protect the environment," Journal of Public Economics, Elsevier, vol. 60(2), pages 251-265, May.
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    12. Kambhu, John, 1989. "Regulatory Standards, Noncompliance and Enforcement," Journal of Regulatory Economics, Springer, vol. 1(2), pages 103-114, June.
    13. John Kambhu, 1989. "Regulatory standards, noncompliance and enforcement," Research Paper 8902, Federal Reserve Bank of New York.
    14. Pitchford, Rohan, 1995. "How Liable Should a Lender Be? The Case of Judgment-Proof Firms and Environmental Risk," American Economic Review, American Economic Association, vol. 85(5), pages 1171-1186, December.
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    Keywords

    Enforcement - regulatory institutions - pollution control - USEPA;

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