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Uncertain Penalties and Compliance

Carol Luengo, Marcelo Caffera () and Carlos Chávez

MPRA Paper from University Library of Munich, Germany

Abstract: We present the results of a series of laboratory economic experiments designed to study compliance behavior of polluting firms when information on the penalty is uncertain. The experiments consist of a regulatory environment in which university students face emission standards and an enforcement mechanism composed of audit probabilities and penalties (conditional on detection of a violation). We examine how uncertainty on the penalty affects the compliance decision and the extent of violation under two enforcement levels: one in which the regulator induces perfect compliance and another one in which it does not. Our results suggest that in the first case, uncertain penalties increase the extent of the violations of those firms with higher marginal benefits. When enforcement is not sufficient to induce compliance, the uncertain penalties do not have any statistically significant effect on compliance behavior. Overall, the results suggest that a cost-effective design of emission standards should consider including public and complete information on the penalties for violations.

Keywords: uncertainty; penalty; emission standard; economic experiment (search for similar items in EconPapers)
JEL-codes: C91 K42 L51 Q58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env, nep-exp and nep-law
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:90945

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