Does the structure of the fine matter?
We study individual compliance behavior with respect to a legal norm in an experimental setting under two different regulatory instruments: emission standards and tradable pollution permits. Compliance to the same set of standards and expected permit holdings was induced with different structures of the fine schedule, namely: a linear and a strictly convex penalty function. Even though our design induces perfect compliance, we find that there are violations in both emissions standards and tradable permits systems, regardless of the penalty structure. Nevertheless, the extent of violations is affected by the penalty parameters under emissions standards, but not under a tradable pollution permits. Notwithstanding, we find that the penalty design has an effect on the average price of permits traded, its dispersion and the number of trades.
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