Enforcement Spillovers: Lessons from Strategic Interactions in Regulation and Product Markets

Mary Evans, Scott M. Gilpatric and Jay Shimshack

Journal of Law and Economics, 2018, vol. 61, issue 4, 739 - 769

Abstract: We explore enforcement spillovers, in which sanctions at one entity influence behavior at other entities. We model spillovers arising from a regulatory channel and from a channel not previously emphasized: product market interactions. Our model motivates empirical hypotheses, which we test using data from manufacturers subject to the Clean Water Act. We find that penalties create positive spillovers for other facilities facing the same regulatory authority, such that enforcement actions reduce pollution at facilities in the same regulatory jurisdiction. However, penalties generate negative spillovers for facilities in the same industry facing a different authority, such that enforcement actions increase pollution at facilities in the same industry but facing a different regulator. Reductions in pollution in a state issuing a fine are about 50 percent offset by increases in pollution in nearby states. Negative spillovers to entities outside of the jurisdiction can be thought of as enforcement leakage.

Date: 2018
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Working Paper: Enforcement spillovers: Lessons from strategic interactions in regulation and product markets (2015)
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