Strategic Behavior and the Environment > Vol 3 > Issue 4

Enforcement Leverage with Fixed Inspection Capacity

Lirong Liu, Department of Economics and International Business, Sam Houston State University, USA, lxl004@shsu.edu William Neilson, Department of Economics, University of Tennessee, USA, wneilson@utk.edu
 
Suggested Citation
Lirong Liu and William Neilson (2013), "Enforcement Leverage with Fixed Inspection Capacity", Strategic Behavior and the Environment: Vol. 3: No. 4, pp 305-328. http://dx.doi.org/10.1561/102.00000034

Published: 21 Aug 2013
© 2013 L. Liu and W. Neilson
 
Subjects
Environmental Economics,  Industrial Organization:Regulatory Economics,  Public policy,  Regulation,  Principal-Agent
 
Keywords
D62L51Q58
Monitoring and enforcementEnvironmental regulationTargetingLeveragingRank-order tournament
 

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In this article:
1. Introduction
2. Firm Behavior under Dynamic Enforcement
3. The Regulator's Monitoring and Enforcement Strategies
4. Simulations
5. Conclusion
Appendix A
Appendix B
References

Abstract

We develop a targeting enforcement mechanism in the context of fixed inspection capacity due to budget constraint. A fixed number of firms are selected for inspection and those with the highest emissions are targeted with higher inspection probability. This structure induces dynamic rank-order tournaments among inspected firms. The differentiated inspection probabilities between targeted and untargeted firms induces leverage effects while the rank-order tournament induces competition effect. The combinations of leverage and competition effects give firms more incentive to abate and stay in compliance. We use numerical simulations to show that targeted firms should be inspected with high probability and that about 2/3 of inspections should be allocated to targeted firms. Furthermore, even suboptimal allocations of inspections and firms to the targeted and untargeted groups can out-perform static enforcement schemes.

DOI:10.1561/102.00000034