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Optimising Enforcement

Optimising Enforcement. Professor Anthony Heyes MA PhD FRSA Royal Holloway College University of London. Two dimensions. The ‘anatomy’ of enforcement - design of enforcement agencies and practices The ‘calibration’ of enforcement – setting the intensity of activities. Calibration.

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Optimising Enforcement

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  1. Optimising Enforcement Professor Anthony Heyes MA PhD FRSA Royal Holloway College University of London

  2. Two dimensions • The ‘anatomy’ of enforcement - design of enforcement agencies and practices • The ‘calibration’ of enforcement – setting the intensity of activities

  3. Calibration • Impact of marginal $ spent on alternative activities should be equated • Resource allocation issue • Marginal impact difficult to measure but agencies should reflect and adjust

  4. Example • Nadeau (JEEM 1997) US paper pulp industry compliance with water and air regulations • 10% increase in EPA monitoring activity leads to a 0.6-4.0% decrease in time in violation • 10% increase in EPA enforcement activity leads to a 4-4.7% decrease in time in violation • Need to convert into dollars to assess optimisation

  5. Objectives • Depends on objective function: maximizing welfare? Maximizing compliance rate for given enforcement budget? • Impacts status of industry costs • And don’t trivialise red-tape costs (evidence that these can be substantial)

  6. Target on basis of characteristics • ‘Profiling’ • Violation risk depends upon observables characteristics of firms (e.g. size, technology) • But beware ‘Lucas Critique’ (e.g. EMS)

  7. Observables vs ‘Corporate Culture’ • Gray and Deily (JEEM 1996) – well-known application to US steel, firm-specific characteristics don’t matter much, but “residual corporate attitude towards compliance” matters • Project: Expand set of observables (e.g. corporate ‘mindset’ – Vazquez et al Argentina)

  8. Motivation for compliance • Need to understand motivation for non-compliance, ‘beyond Becker’ • Role of ignorance (especially amongst ‘small’ players) • Psychology of compliance e.g. Winter and May (JPAM 2001) regulatory compliance amongst Danish farmers on role of legalism vs. flexibility

  9. Examples • Many examples of ‘compliance propensity’ function being estimated • Example 1: Dietrich (JEEM 2004) wastewater discharges in Kansas 1990-98 • Example 2: Kang and Lee (E&DE 2004) air emissions in Korea 1987-89 • Example 3: Rousseau (M/S 2004) water permits violations in textile industry, Belgium – role of ‘environmental coordinator’

  10. Target on basis of past performance • Lots of academic interest in ‘inter-temporal optimisation’ • ‘Penalty Leverage’ - poor performers put into high scrutiny group until improve • Can substantially improve efficiency of enforcement program • Lots of evidence of targeting based on past performance, but optimised ?

  11. Example • Eckert (JEEM 2004), leaks from petroleum storage tanks in Manitoba • 2-stage probit model of role of inspections and prosecution • Inspection/warnings matter, but not much – simulate 2x inspection rate, reduces violations in Winnipeg by 9%. • Prosecutions drive incentives

  12. Random things to think about • ‘Tournament Theory’ – enforcement based on relative performance, exploit more systematically • ‘Regulatory dealing’ – buying over-performance in one area ‘in exchange for’ relief elsewhere • ‘Regulatory style’ – psychology of enforcement, and compatibility with corporate attitudes • Other penalties – ‘naming and shaming’, criminal sanctions against individuals etc.

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