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

  • Heyes, Anthony
  • Doucet, Joseph

    ()

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.

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Paper provided by Université Laval - Département d'économique in its series Cahiers de recherche with number 9717.

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Date of creation: 1997
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Handle: RePEc:lvl:laeccr:9717
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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. Boyd, James & Kunreuther, Howard, 1997. "Retroactive Liability or the Public Purse?," Journal of Regulatory Economics, Springer, vol. 11(1), pages 79-90, January.
  3. Bebchuk, Lucian Arye & Kaplow, Louis, 1992. "Optimal Sanctions When Individuals Are Imperfectly Informed about the Probability of Apprehension," The Journal of Legal Studies, University of Chicago Press, vol. 21(2), pages 365-70, June.
  4. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  5. Anthony Heyes, 1994. "Environmental enforcement when ‘inspectability’ is endogenous: A model with overshooting properties," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 4(5), pages 479-494, October.
  6. John Kambhu, 1989. "Regulatory standards, noncompliance and enforcement," Research Paper 8902, Federal Reserve Bank of New York.
  7. Garvie, Devon & Keeler, Andrew, 1994. "Incomplete enforcement with endogenous regulatory choice," Journal of Public Economics, Elsevier, vol. 55(1), pages 141-162, September.
  8. 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 1171-86, December.
  9. Badrinath, S G & Bolster, Paul J, 1996. "The Role of Market Forces in EPA Enforcement Activity," Journal of Regulatory Economics, Springer, vol. 10(2), pages 165-81, September.
  10. Barrett, James & Segerson, Kathleen, 1997. "Prevention and Treatment in Environmental Policy Design," Journal of Environmental Economics and Management, Elsevier, vol. 33(2), pages 196-213, June.
  11. Heyes, Anthony G., 1996. "Cutting environmental penalties to protect the environment," Journal of Public Economics, Elsevier, vol. 60(2), pages 251-265, May.
  12. Kambhu, John, 1989. "Regulatory Standards, Noncompliance and Enforcement," Journal of Regulatory Economics, Springer, vol. 1(2), pages 103-14, June.
  13. Shaffer, Sherrill, 1990. "Regulatory Compliance with Nonlinear Penalties," Journal of Regulatory Economics, Springer, vol. 2(1), pages 99-103, March.
  14. Magat, Wesley A & Viscusi, W Kip, 1990. "Effectiveness of the EPA's Regulatory Enforcement: The Case of Industrial Effluent Standards," Journal of Law and Economics, University of Chicago Press, vol. 33(2), pages 331-60, October.
  15. Karpoff, Jonathan M & Lott, John R, Jr, 1993. "The Reputational Penalty Firms Bear from Committing Criminal Fraud," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 757-802, October.
  16. Davis, Michael L, 1994. "The Value of Truth and the Optimal Standard of Proof in Legal Disputes," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 343-59, October.
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