Enforcement Leverage with Fixed Inspection Capacity

Lirong Liu and William Neilson

Strategic Behavior and the Environment, 2013, vol. 3, issue 4, 305-328

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.

Keywords: Monitoring and enforcement; Environmental regulation; Targeting; Leveraging; Rank-order tournament (search for similar items in EconPapers)
JEL-codes: D62 L51 Q58 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlsbe:102.00000034

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