Uncertain penalties and compliance: experimental evidence
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We present the results of a series of economic laboratory experiments designed to study the compliance behavior of polluting firms when penalties are stochastic. The experiments consist of a regulatory environment in which university students faced emission standards and an enforcement mechanism composed of audit probabilities and penalties (conditional on detection of a violation). We examine how uncertainty about the penalty affects the compliance decision and the extent of violation with two levels of enforcement: 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 violations in 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 include complete, public information on the penalties for violations.
KeywordsUncertainty Penalty Emission standard Economic experiment
JEL ClassificationC91 L51 Q58 K42
We gratefully acknowledge financial support provided by the Dirección de Investigación y Creación Artística, Vicerectoría de Investigación y Desarrollo, Universidad de Concepción, under the project DIUC No 212.042.017-1.0, and by the Agencia Nacional de Investigación e Innovación (ANII) - Fondo Clemente Estable - Uruguay, under Project FCE_2009_1_2801. Luengo acknowledges the support provided by the Comisión Nacional de Investigación Científica y Tecnológica (CONICYT) through the scholarship program to complete master studies in Chile and to the Research Nucleus in Environmental and Natural Resource Economics for the thesis completion scholarship. Chávez acknowledge additional partial funding for this research provided by INCAR through CONICYT/FONDAP/15110027. We thank Eduardo Cancela for his valuable support in the programming stage, and the logistical support for conducting the experiments from Osvaldo Figueroa, Marcela Alveal, Manuel Saldía, and Carla Chávez.
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