Essays on Environmental Policies Under Incomplete Enforcement

Essay 1In this paper I model the optimal monitoring and enforcement strategy when inspection capacity is fixed by budget or manpower constraints. I adopt a leverage enforcement structure that classifies firms into two groups with different enforcement intensities. Optimal monitoring and enforcement requires effective allocation of the fixed number of inspections to the two groups. In each period, a fixed number of firms are selected from each group for inspection, and those with the highest emissions are placed in the targeted group in which the inspection probability is higher. This transition structure induces rankorder tournaments among inspected firms. Once selected for inspection, the emissions of each firm are subject to a standard above which the firm pays a fixed penalty. I find that a regulator facing inspection capacity constraints should leverage the limited inspections by allocating more inspections to the targeted group. In addition, I show that targeting enforcement is generally superior to static enforcement. This is in accordance with findings in the literature. These results are consistent over different ranges of regulatory parameters. Essay 2We model the optimal design of programs requiring firms to disclose harmful emissions when disclosure yields both direct and indirect benefits. The indirect benefit arises from the internalization of social costs and resulting reduction in emissions. The direct benefit results from the disclosure of previously private information which is valuable to potentially harmed parties. Previous theoretical and empirical analyses of such programs restrict attention to the former benefit while the stated motivation for such programs highlights the latter benefit. When disclosure yields both direct and indirect benefits, policymakers face a tradeoff between inducing truthful self-reporting and deterring emissions. Internalizing the social costs of emissions, such as through a Pigovian tax, will deter emissions, but may also reduce incentives for firms to truthfully report their emissions. Essay 3This paper investigates the compliance behavior of firms simultaneously regulated under multiple environmental programs. Three possible relationships among regulatory programs are considered: complementarity, substitution and independence. I develop a theoretical model of firm decision making that shows the potential for interrelationships among regulations. I propose an indirect test of the theoretical results and implement the empirical model using data on compliance with Resource Conservation and Recovery Act (RCRA) for facilities in Michigan that are regulated under both RCRA and Clean Air Act (CAA). Results show evidence of positive cross program effects such that an increase in measures of CAA enforcement intensity lead to increased firm compliance with RCRA; the empirical results are consistent with a complementary relationship between the two programs. Thus coordination is required for optimal monitoring and enforcement strategies