Abstract
This paper examines the optimal fine for violations of environmental regulations, taking into account financial constraints facing regulated firms and the hierarchical structure of regulatory enforcement. Contrary to the existing literature, which suggests that maximal fines are sub-optimal, we find that the optimal fine is either the maximum amount the firm can afford to pay or zero (i.e., no regulation). The impact of a change in industry structure on the optimal fine, firm compliance and regulatory resource strategies is considered. We identify conditions under which the equilibrium level of regulatory resources decreases with an increase in the number of firms in the industry.
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Lear, K.K., Maxwell, J.W. The Impact of Industry Structure and Penalty Policies on Incentives for Compliance and Regulatory Enforcement. Journal of Regulatory Economics 14, 127–148 (1998). https://doi.org/10.1023/A:1008005201435
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DOI: https://doi.org/10.1023/A:1008005201435