Analyses in the literature on regulatory enforcement usually assume that regulatory agencies know all of the entities subject to regulation. But constant entry and exit of firms create gaps in agencies’ knowledge of regulated entities. This paper conducts a theoretical and empirical analysis of firms’ compliance strategy when such enforcement gaps are present. Our theoretical analysis indicates that a firm with a sufficiently low probability of being subject to enforcement action will delay compliance. We analyze the effect of enforcement gaps on the compliance protocol development component of regulations empirically in the context of nutrient management regulations in Maryland. The Maryland Department of Agriculture (MDA), which enforces this regulation, relies on a registry of farms that includes less than half of the farm operations in the state. We conduct an econometric analysis using farm-level survey data combined with county-level enforcement data. Our econometric model indicates that the probability of being included in the MDA farm registry is associated with a statistically significant and economically meaningful increase in the probability of being in compliance with nutrient management regulations. This result suggests that enforcement gaps can have a significant effect on the performance of environmental regulations.
This is a preview of subscription content, log in to check access.
Buy single article
Instant access to the full article PDF.
Price includes VAT for USA
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
This is the net price. Taxes to be calculated in checkout.
The OIG review covered regulations enforcing all major environmental legislation, including the Clean Air Act, the Clean Water Act, the Federal Insecticide, Fungicide, and Rodenticide Act, the Toxic Substances Control Act, the Safe Drinking Water Act, and the Resource Conservation and Recovery Act.
The regulator may interact with a firm along multiple dimensions. For example, a regulator may enforce different regulations on the same firm. In this case, each regulation would be a different dimension along which the regulator interacts with the firm.
This form of regulation is common in the health and safety context, among others. Food safety regulations based on the Hazard Analysis of Critical Control Points (HACCP) concept, of instance, require firms to develop detailed plans for (a) ensuring that food does not become contaminated during processing and (b) for handling any incidents of contamination that may occur. Periodic inspections are used to determine whether acceptable plans are in place and whether observed equipment and operating procedures are consistent with that plan. Regulations governing occupational safety, protection of patient medical data, and quality of care in skilled nursing facilities have the same general structure. Recipients of farm subsidies are required to have in place a conservation plan approved by local Natural Resource Conservation Service or soil conservation district technicians; failure to comply can result in loss of access to new subsidies and, in some cases, demands to repay subsidies already received. The equivalent two-stage process in some industries consists of (1) installing pollution control equipment (e.g., smokestack scrubbers) and (2) keeping that equipment in operation at all times it is needed.
We are ruling out the case where a firm does not file but complies with a protocol as that option is strictly dominated.
If a firm is able to reduce the penalty (plus the cost of effort expended on reducing the penalty) below the cost of compliance, it will be optimal for the firm to remain out of compliance indefinitely.
Animal units are defined as follows: 1 beef cow = 1 animal unit, 1 bird = 0.008 animal units, 1 dairy cow = 1.25 animal units, 1 pig = 0.4 animal units, 1 sheep/goat/lamb = 0.1 animal units, and 1 horse = 2 animal units.
Our theoretical analysis assumes that (a) the fine for failure to file a protocol is less than the fine for failure to comply and (b) fines for noncompliance exceed compliance costs. The cumulative nature of the fine for noncompliance with a NMP means that it can easily exceed the fine for failure to file a NMP. The cost of a typical NMP in Maryland is about $1200 or roughly $400 a year since a plan is valid for 3 years. Following a plan’s recommendations for fertilizer and manure use rarely increases annual nutrient management expenditures and may well reduce them (see for example Lawley et al. 2009). The combination of formal and informal penalties can thus easily exceed the costs of filing and implementing a NMP.
There is no reason to believe that the response rate was affected by a desire to avoid revealing information to MDA. The survey is administered by NASS, which has no regulatory role in the implementation of the WQIA, conducts numerous surveys about farming activities every year, and does not share individual-specific data with MDA. Farmers would thus have no reason to believe that their responses would have any regulatory implications. The fact that 23.2% of respondents with characteristics indicating that they were required to adopt a nutrient management plan reported not having one provides additional evidence that respondents did not believe that their responses would be used for regulatory purposes.
This farm size distribution is typical of that in the US as a whole.
Alberini, A., Lichtenberg, E., Mancini, D., & Galinato, G. I. (2008). Was it something I ate? Implementation of the FDA seafood HACCP program. American Journal of Agricultural Economics, 90(1), 28–41.
Almer, C., & Goeschl, T. (2010). Environmental crime and punishment: Empirical evidence from the German penal code. Land Economics,86(4), 707–726.
Bebchuk, L. A., & Kaplow, L. (1993). Optimal sanctions and differences in individuals’ likelihood of avoiding detection. International Review of Law and Economics, 13(2), 217–224.
Becker, G. S. (1968). Crime and punishment: An economic approach. Journal of Political Economy,76(2), 169–217.
Bureau of Labor Statistics. (2019). Establishment age and survival statistics. Retrieved August 9, 2019, from https://www.bls.gov/bdm/bdmage.htm#AG.
Chesapeake Bay Foundations (CBF). (2017). The history of Chesapeake Bay cleanup efforts. Retrieved from http://www.cbf.org/how-we-save-the-bay/chesapeake-clean-water-blueprint/the-history-of-bay-cleanup-efforts.html. Accessed Nov 17, 2017.
Chislock, M. F., Doster, E., Zitomer, R. A., & Wilson, A. E. (2013). Eutrophication: Causes, consequences, and controls in aquatic ecosystems. Nature Education Knowledge,4(4), 10.
Cohen, M. (1999). Monitoring and enforcement of environmental policy. International Yearbook of Environmental and Resource Economics, 3, 44–106.
Deutsch, W. (2017). Surprising numbers behind start-up survival rates. Chicago Booth Review. https://review.chicagobooth.edu/entrepreneurship/2017/article/surprising-numbers-behind-start-survival-rates. Accessed Nov 17, 2017.
Earnhart, D. (2004). Regulatory factors shaping environmental performance at publicly-owned treatment plants. Journal of Environmental Economics and Management, 48(1), 655–681.
Eckert, H. (2004). Inspections, warnings, and compliance: The case of petroleum storage regulation. Journal of Environmental Economics and Management,47(2), 232–259.
Esworthy, R. (2014). Federal pollution control laws: How are they enforced? Retrieved from Congressional Research Service website: https://fas.org/sgp/crs/misc/RL34384.pdf. Accessed Nov 17, 2017.
Farenthold, D. A. (2010). Perdue, poultry farms sued for polluting Chesapeake Bay. Washington Post, March 2.
Glicksman, R. L., & Earnhart, D. H. (2007). The comparative effectiveness of government interventions on environmental performance in the chemical industry. Stanford Environmental Law Journal, 26, 317.
Gray, W. B., & Shimshack, J. P. (2011). The effectiveness of environmental monitoring and enforcement: A review of the empirical evidence. Review of Environmental Economics and Policy, 5(1), 3–24.
Goeringer, P. (2013). Understanding agricultural liability: Maryland’s right to farm law. College Park: Center for Agricultural and Natural Resource Policy Fact Sheet, University of Maryland.
Harrington, W. (1988). Enforcement leverage when penalties are restricted. Journal of Public Economics, 37(1), 29–53.
Helland, E. (1998). The enforcement of pollution control laws: Inspections, violations, and self-reporting. Review of Economics and Statistics, 80(1), 141–153.
Heyes, A. G. (1994). Environmental enforcement when ‘inspectability’ is endogenous: A model with overshooting properties. Environmental and Resource Economics, 4(5), 479–494.
Heyes, A. G. (2000). Implementing environmental regulation: Enforcement and compliance. Journal of Regulatory Economics,17(2), 107–129.
Heyes, A. G. (2002). A theory of filtered enforcement. Journal of Environmental Economics and Management, 43(1), 34–46.
Heyes, A. G., & Rickman, N. (1999). Regulatory dealing—Revisiting the Harrington paradox. Journal of Public Economics,72(3), 361–378.
Innes, R. (1999a). Remediation and self-reporting in optimal law enforcement. Journal of Public Economics, 72(3), 379–393.
Innes, R. (1999b). Self-policing and optimal law enforcement when violator remediation is valuable. Journal of Political Economy, 107(6), 1305–1325.
Innes, R. (2001). Violator avoidance and self-reporting in optimal law enforcement. Journal of Law and Economic Organization, 17(1), 239–256.
Kaplow, L., & Shavell, S. (1994). Optimal law enforcement with self-reporting of behavior. Journal of Political Economy, 102(3), 583–606.
Kambhu, J. (1989). Regulatory standards, compliance and enforcement. Journal of Regulatory Economics, 1(2), 103–114.
Laplante, B., & Rilstone, P. (1996). Environmental inspections and emissions of the pulp and paper industry in Quebec. Journal of Environmental Economics and Management, 31(1), 19–36.
Lawley, C., Lichtenberg, E., & Parker, D. (2009). Biases in nutrient management planning. Land Economics, 85(1), 186–200.
Lichtenberg, E., Parker, D., & Lane, S. (2010). Best management practice use and nutrient management in Maryland: A 2010 snapshot. College Park: Center for Agricultural and Natural Resource Policy, University of Maryland.
Lim, J. (2016). The impact of monitoring and enforcement on air pollutant emissions. Journal of Regulatory Economics, 49(2), 203–222.
Livernois, J., & McKenna, C. J. (1999). Truth or consequences: Enforcing pollution standards. Journal of Public Economics,71(3), 415–440.
Magat, W., & Viscusi, W. (1990). Effectiveness of the EPA’s regulatory enforcement: The case of industrial effluent standards. The Journal of Law & Economics,33(2), 331–360.
Malik, A. S. (1990). Avoidance, screening and optimum enforcement. The RAND Journal of Economics,21, 341–353.
Malik, A. S. (1993). Self-reporting and the design of policies for regulating stochastic pollution. Journal of Environmental Economics and Management, 24(3), 241–257.
Malik, A. S. (2014). The desirability of forgiveness in regulatory enforcement. Journal of Regulatory Economics, 46(1), 1–22.
Maryland Department of Agriculture (MDA). (2014). AgBrief nutrient management programs. http://mda.maryland.gov/Documents/ag_brief/AgBrief_NM.pdf.
Maryland Water Quality Improvement Act of 1998, 15 MD § 8-801-8-806 (1998).
McCann, L. M. (2009). Transaction costs of environmental policies and returns to scale: The case of comprehensive nutrient management plans. Review of Agricultural Economics,31(3), 561–573.
McClelland, J. D., & Horowitz, J. K., J.K (1999). The costs of water pollution regulation in the pulp and paper industry. Land Economics, 75, 220–232.
Muoghalu, M. I., Robison, H. D., & Glascock, J. L. (1990). Hazardous waste lawsuits, stockholder returns, and deterrence. Southern Economic Journal,57, 357–370.
Nowell, C., & Shogren, J. F. (1994). Challenging the enforcement of environmental regulation. Journal of Regulatory Economics, 6, 265–282.
Phillips, S., & McGee, B. (2016). Ecosystem service benefits of a Cleaner Chesapeake Bay. Coastal Management,44(3), 241–258.
Polinsky, A. M., & Shavell, S. (2000). The economic theory of public enforcement of law. Journal of Economic Literature, 38(1), 45–76.
Polinsky, A. M., & Shavell, S. (2007). The theory of public enforcement of law. Handbook of Law and Economics, 1, 403–454.
Russell, C. S. (1990). Monitoring and enforcement. In P. R. Portney (Ed.), Public policies for environmental protection. Washington, D.C.: Resources for the Future.
Rousseau, S. (2009). The use of warnings in the presence of errors. International Review of Law and Economics, 29(3), 191–201.
Shimshack, J. P. (2014). The economics of environmental monitoring and enforcement. Annual Review of Resource Economics, 6(1), 339–360.
Shimshack, J. P., & Ward, M. B. (2005). Regulator reputation, enforcement, and environmental compliance. Journal of Environmental Economics and Management, 50(3), 519–540.
Stafford, S. L. (2002). The effect of punishment on firm compliance with hazardous waste regulations. Journal of Environmental Economics and Management, 44(2), 290–308.
Telle, K. (2009). The threat of regulatory environmental inspection: Impact on plant performance. Journal of Regulatory Economics,35(2), 154–178.
Telle, K. (2013). Monitoring and enforcement of environmental regulations: Lessons from a natural field experiment in Norway. Journal of Public Economics, 99, 24–34.
US EPA. Office of the Inspector General. (2005). Limited knowledge of the universe of regulated entities impedes EPA’s ability to demonstrate changes in regulatory compliance. Washington, D.C.: United States Environmental Protection Agency, Office of Inspector General.
US EPA. Office of the Inspector General. (2019). EPA not effectively implementing the lead-based paint renovation, repair, and painting rule. Washington, D.C.: United States Environmental Protection Agency, Office of Inspector General.
About this article
Cite this article
Andarge, T., Lichtenberg, E. Regulatory compliance under enforcement gaps. J Regul Econ 57, 181–202 (2020). https://doi.org/10.1007/s11149-020-09405-0
- Environmental regulation
- Nutrient management
- Water quality