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Optimising Enforcement

Delve into the complex world of enforcement optimization with Professor Anthony Heyes as he explores the anatomy and calibration of enforcement agencies, impacts of resource allocation, targeting based on firm characteristics, and motivations for compliance and non-compliance.

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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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