Self-policing in a targeted enforcement regime

Southern Economic Journal, April, 2008 by Sarah L. Stafford

5. Implications of Self-Policing for Environmental Performance

As shown in Table 4, a targeted enforcement regime with self-policing can elicit a wide range of behavior. To evaluate the implications of self-policing for environmental performance, we thus need to consider how introducing self-policing changes facility behavior. To determine what facilities will do in the absence of self-policing, I set the penalty for disclosed violations equal to the penalty for detected violations (k R : F) and keep all facilities that disclose in the target group in the target group for the next period (q = 0). We can then compare the optimal facility policy with and without self-policing to determine the effect that self-policing has on compliance behavior. Table 5 summarizes the changes in optimal facility behavior that can occur when self-policing is introduced.

When there is no self-policing, all policies that involve disclosure are dominated by analogous policies that involve concealment. Obviously the introduction of self-policing will increase the number of disclosures; although, some facilities will continue to not disclose either because of the relative cost of auditing and disclosing or because they have nothing to gain from disclosure. While regulators are likely to value the disclosures themselves as a valuable source of information, introducing self-policing will also increase the number of facilities that audit, which in turn will increase the number of facilities that promptly remediate probabilistic violations. As shown in Table 5, this increase in auditing will occur at some facilities with high audit costs; although, it will only occur when the facilities are in the target group because the self-policing policy modeled in this paper does not benefit facilities in the nontarget group.

Introducing self-policing can also change the incentives for a facility to deliberately violate regulations. Interestingly, depending on a facility's costs and the reward to self-policing, self-policing can serve as both a substitute for and a complement to abatement. To illustrate this point, consider Figure 2, which shows how the introduction of self-policing affects optimal facility behavior for the same set of regulatory parameters used in Figure 1. The solid lines show how the space is partitioned prior to the implementation of self-policing, and the dashed lines show how the space is partitioned after self-policing is introduced. For each region, the first policy listed is the optimal policy without self-policing, and the second is the optimal policy with self-policing.

[FIGURE 2 OMITTED]

Recall that facilities in the target group can transition to the nontarget group either through a clean inspection report or through a voluntary disclosure. For some facilities, disclosing a violation may be a more cost-effective pathway back to the nontarget group than abatement, and thus they may substitute disclosure for abatement in the target group. In Figure 2, this type of substitution is shown by the two small regions near the top-left side of the figure. Some facilities with low audit costs and high abatement costs switch from [f.sub.43] to [f.sub.46] when self-policing is introduced, and some facilities with moderate audit costs and high abatement costs switch from [f.sub.23] to [f.sub.26]. While the exact size of the region in which this type of substitution can occur will depend on the parameters of the model, the range over which it occurs is always relatively small. However, it is important to remember we do not know the underlying distribution of facility audit and abatement costs. Therefore, even though the range of costs over which a particular policy is optimal may be limited, there could be a significant number of facilities in any given region of the figure.