Regulatory Enforcement with Discretionary Fining and Litigation

In this paper, we focus on the determination of the optimal fine set by a regulator when a firm can litigate to avoid paying the fine and the monitoring agency has discretionary power to negotiate with the firm the size of the fine. The regulator needs to balance the positive effect of the fine's size on the degree of non–compliance and the possibility of litigation if the fine is too high. We find that the optimal fine is not necessarily set at its maximum level.     

Environmental regulatory enforcement with “green” consumers

We consider a standard probabilistic model of random monitoring to analyze the interactions between a firm and a monitoring agency in the presence of “green” consumers when compliance payoffs are contingent on monitoring and monitoring costs are shared by the monitoring agency and the firm. When the amount paid by the firms if monitored is exogenously fixed, we find that full compliance is implemented with a finite fine. If there is an upper bound for the fine and the regulator determines endogenously the fine and the amount paid by the firms if monitored, we find that full compliance is also achieved, although the optimal fine is now set at its maximum level. The optimal amount paid by the firms if monitored is lower than the environmental premium the compliant firm gets.The author thanks two anonymous referees for their useful comments and suggestions     

Standards and the regulation of environmental risk

We study regulatory design for a pollution-generating firm who is better informed than the regulator regarding pollution mitigation possibilities, and who chooses an unobservable action when employing a particular mitigation plan. We distinguish among performance, process, and design standards, and study the relative merit of each type of regulatory instrument. Relative to previous work on standards design, we emphasize technology and process verification. An optimal performance standard is relatively strict when regulator and firm preferences are congruent, but the regulator may prefer no performance standard at all if verification costs are sufficiently high. A process standard unambiguously increases expected surplus (relative to no regulation) in some environments, and otherwise improves welfare only when it is unlikely to generate a “bad” technology choice by the firm. A design standard can improve welfare if the regulator is sufficiently well informed about the technological possibilities for pollution control, but only when the firm’s private benefits from technology choice are sufficiently small.     

The Impact of Industry Structure and Penalty Policies on Incentives for Compliance and Regulatory Enforcement

This paper examines the optimal fine for violations of environmental regulations, taking into account financial constraints facing regulated firms and the hierarchical structure of regulatory enforcement. Contrary to the existing literature, which suggests that maximal fines are sub-optimal, we find that the optimal fine is either the maximum amount the firm can afford to pay or zero (i.e., no regulation). The impact of a change in industry structure on the optimal fine, firm compliance and regulatory resource strategies is considered. We identify conditions under which the equilibrium level of regulatory resources decreases with an increase in the number of firms in the industry.     

Environmental enforcement when ‘inspectability’ is endogenous: A model with overshooting properties

If a firm can influence its monitorability vis-à-vis an environmental regulator, it is shown that increasing the thoroughness of inspections induces the firm to substitute towards more transparent technologies, whilst increasing their frequency may cause substitution the other way. Perversely, when the effect of such substitution is taken into account, an increase in the frequency of inspections (or, equally, the stringency of penalties) may worsen the firm's environmental performance. The agency should favour more thorough inspections than existing theory suggests, particularly in sectors where the scope for such substitution is great. Moreover, when monitorability adjusts only sluggishly to policy shocks (because it is an embodied characteristic of capital, for example) the environmental impacts of increased frequency and increased thoroughness well over- and under-shoot their respective long-run impacts. In assessing regulatory reform, therefore, it is important to leave sufficient time for the class of adjustments identified to occur. The possibility of overshooting can be used as an alternative to existing regulatory capture theories to explain why the efficacy of some classes of regulatory reform may fade through time.     

Environmental Enforcement with Endogenous Ambient Monitoring

We consider an inspection game between n polluting firms and an environmental enforcement agency. If the cost of monitoring ambient pollution is low enough, the optimal inspection policy consists in imposing the maximal possible fine, and mixing between observing ambient pollution and not conducting any inspection at all. However, with stringent upper limits on the fine, the agency mixes between observing ambient pollution and inspecting all firms. The observation of ambient pollution is always followed by sequentially rational firm inspections. Comparisons with Franckx (2002a, Journal of Environmental Economics and Management 43, 71–92, 2002b, Topics in Economic Analysis Policy 2(1), Article 1) show that commitment power has a very strong impact on the value of prior information.     

Climate Policy with Tied Hands: Optimal Resource Taxation Under Implementation Lags

In this paper we present a Stackelberg differential game to study the dynamic interaction between a polluting firm and a regulator who sets pollution limits overtime. At each time, the firm settles emissions taking into account the fine for non-compliance with the pollution limit, and balances current costs of investments in a capital stock which allows for future emission reductions. We derive two main results. First, we show that the optimal pollution limit decreases as the capital stock increases, while both emissions and the level of non-compliance decrease. Second, we find that offering fine discounts in exchange for firm’s capital investment is socially desirable. We numerically obtain the optimal value of such discount, which crucially depends on the severity of the fine. In the limiting scenario with a very large severity of the fine, the optimal discount implies that no penalties are levied, since the firm shows adequate adaptation progress through capital investment.     

Imperfect verification,appeals, and limited liability

We examine the effect of an imperfect verification and a subsequent appeals process in regulatory settings where legal or institutional restrictions impose an upper bound on penalties. We show that the verification always enhances social welfare despite the limit on penalties. The subsequent appeals process, which allows the firm to challenge an unfavorable finding by the regulator, is never socially optimal when it is costless. However, when the appeals process is costly, it can be optimal even if it is less accurate than the verification. Moreover, social welfare can increase as the cost of the appeals process increases.     

Regulatory Policy Design in an Uncertain World

The paper examines principal–agent relationships in uncertain environments where beliefs of the contracting parties (the regulator and the firm) are represented by sets of probabilities. In addition to fully characterizing the first‐best and the second‐best solutions, we examine optimality of zero‐risk, fixed‐payment schemes and the relationship between the first‐best and the second‐best solutions. In the second‐best world, where the regulator can only contract on the quality of the good, a zero‐risk standard is optimal when the firm has beliefs that are so ambiguous that the firm’s marginal rate of transformation belongs to the set of the firm’s relative probabilities.     

Effects of regulatory burden and corruption on firm performance: Evidence from Moldova

Firms in Moldova face a high level of regulatory burden, as proxied by the number of inspections by public authorities. At the same time, they face high levels of corruption. We examine the effect of frequent inspections on four measures of firm performance: labour and total factor productivity, and levels of tangible and intangible assets. We also investigate how corruption affects the relationship between inspections and firm performance. We perform panel data analysis using firm-level administrative data and survey data from Moldova in 2005–2015. The results show that inspections and corruption each affect firm productivity negatively, but corruption moderates the negative effect of inspections. We also find that inspections and intangible assets are positively correlated, but this correlation is weaker for higher levels of corruption. Finally we examine whether these results differ by industry, firm size and ownership types. Inspections and corruption affect medium and large firms, and state-owned enterprises differently from micro and small firms and private firms respectively.     

Regulating a risk-averse firm under incomplete information

We examine the optimal regulatory policy for a risk-averse firm when the firm is imperfectly informed about its efficiency parameter for a project at the time of contracting. The firm’s risk aversion shifts the optimal regulatory policy from a fixed-price contract to a cost-plus contract. The optimal regulatory policy entails undereffort by an inefficient firm as in Laffont and Tirole (J Polit Econ 94(3):614–641, 1986) and the effort distortion increases as the firm becomes more risk-averse. Further, the regulator benefits from sequential contracting with the firm where the firm chooses contract terms gradually as it acquires information, albeit the benefit diminishes as the firm becomes more risk-averse.      

Optimal environmental regulation based on more than just emissions

I develop a principal-agent model of environmental regulation in which the regulator can acquire two costly signals of the firm’s abatement effort. Acquisition of the second signal is conditioned on the observed value of the first, emissions signal. The optimal contract takes the form of an emissions standard when only the emissions signal is acquired, and a set of contingent emissions standards when both signals are acquired; the standards are coupled with uniform, maximal penalties for noncompliance. Acquisition of the second signal may be optimal when intermediate values of the first signal are observed but not when extreme values are observed.      

Regulating a Polluting Firm Under Asymmetric Information

This paper reinterprets the Laffont-Tirole model of regulation under asymmetric information to cover the case of pollution control. The asymmetry of information concerns the firm's cost of lowering its pollution. The regulator has three objectives: Ensuring an efficient abatement level, generating 'green taxes' and securing the survival of the firm. We show that when optimal abatement is important relative to tax generation, the regulator cannot use the policy of offering the firm a set of linear tax schemes from which to choose. By contrast, this policy is optimal in the Laffont-Tirole model under certain not very restrictive assumptions. We proceed to establish a simple rule for when to shut-down inefficient types. In an example with specific functional forms, we derive the optimal tax function both analytically and graphically. We show the effect on the optimal tax system of a change in a technological parameter.     

Pollution standards, technology investment and fines for non-compliance

In this paper, we analyze whether it is socially desirable that fines for exceeding pollution standards depend not only on the degree of non-compliance but also on technology investment efforts by the polluting firms. For that purpose, we consider a partial equilibrium framework where a representative firm chooses the investment effort and the pollution level in response to an environmental policy composed of a pollution standard, an inspection probability and a fine for non-compliance. We find that the fine should strictly decrease with the investment effort when (i) there are administrative costs of sanctioning; (ii) the optimal policy induces non-compliance; and (iii) either the fine is sufficiently convex in the degree of non-compliance or the investment effort decreases marginal abatement costs significantly.     

Spatial Management of Invasive Species: Pathways and Policy Options

In addressing the problem of invasive species, decision makers have a variety of options, each targeting different aspects as it evolves over time and space. We develop a 2-region bioeconomic model that includes several transmission pathways that spread the invader. Within each region, inspections, removal efforts, and sustainable land management practices, including habitat restoration and less damaging production activities, are available to the regulator. We investigate the implications of different transmission pathways and second-best policies on the control patterns and invasive populations. Second-best settings where certain controls are not available to the regulator result in large distortions on the optimal use of the land. Overall, we find that non-linear interactions between regions, pathways, and controls are significant determinants of the optimal management of invasive species.     

Optimal pollution control in a mixed oligopoly with research spillovers

We study optimal pollution abatement under a mixed oligopoly when firms engage in emissions‐reducing research and development (R&D) with imperfect appropriation. The regulator uses a tax to curb emissions. Results show that in a mixed oligopoly, the public firm has positive emissions reduction in equilibrium; however, emissions reductions of the private firm could be positive or zero. Under certain conditions, the optimal pollution tax is positive; otherwise, the tax reverts to a subsidy. Comparing mixed and private duopolies, privatisation leads to reductions in R&D and output, but to an increase in overall emissions, so privatisation tends to make the environment worse.     

Environment, Asset Characteristics, and Optimal Effluent Fees

This article investigates theissue of optimal effluent fees in a frameworkwhere waste emissions are abated by investingin capital of which the pay-off is uncertainand the cost is fully sunk. The stock of wasteemissions harms an individual firm'sproduction, but the firm will underestimatethis external effect upon investing. Consequently, the firm will invest lesscapital, and thereby, pollute more than issocially desirable. The regulator, who can useeffluent fees to correct this, should imposelower effluent fees on irreversible investmentsthan on costlessly reversible ones whenuncertainty arises.     

RETAIL PRICE REGULATION AND THE OPTION TO DELAY

ABSTRACT ** :  This paper examines a two-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which a monopolist decides to invest early as well as the underlying overall welfare output. In a regulated environment, we consider a monopolist who faces no downstream (final good) competition but is subject to retail price regulation. We identify the welfare-maximizing regulated prices when the unregulated market outcome is set as the benchmark. We show that if the regulator can commit to ex post regulation – that is, regulated prices that are contingent to future demand realization – then regulated prices that allow the firm to recover its total costs of production are welfare-maximizing. Thus, under ex post price regulation there is no need to compensate the regulated firm for the option to delay that it foregoes when investing today. We argue, however, that regulators cannot make this type of commitment and, therefore, price regulation is often ex ante – that is, regulated prices are not contingent to future demand. We show that the optimal ex ante regulation, and the extent to which regulated prices need to incorporate an option to delay, depend on the nature of demand uncertainty.     

Comparative statics of the optimal dynamic incentive contract

Each period a firm must carry out an indivisible project, the cost of which depends on the firm's constant efficiency and its (variable) level of ‘effort’. Only the cost is observed by the regulator who has to choose the incentive scheme. The optimal dynamic mechanism is derived under possible commitment of the regulator over time. Then, under non-commitment, it is shown that there are four types of continuation equilibria. Also the profile of effort levels is compared to the commitment case. Finally, some numerical comparative statics is performed and it is shown that all types of equilibria can be optimal.     

A Theory of Soft Capture

In this paper, we propose an alternative model for capture that is based not on reciprocity but on congruence of interests between the firm and the regulator. A regulator is charged by a political principal to provide an imperfect signal for the type of a regulated firm. Only the firm can observe its type, and the production of a signal is costly. The firm can provide a costless alternative signal of lower accuracy to the regulator. In a self‐enforcing equilibrium, the regulator transmits the firm‐produced signal and saves information‐gathering costs, and the firm enjoys higher information rents.