The Role of Information in Policy Implementation

Abstract

Firms will comply with a regulation when the expected costs of noncompliance exceed the expected benefits. If the regulator has incomplete enforcement information and firms are aware of this, it will enter into their calculation of expected benefits and costs. The literature on regulatory enforcement typically assumes that the regulator is able to identify the universe of regulated firms. In my dissertation, I relax this assumption by allowing for the existence of regulatory information gaps and examine the implications for compliance and ambient environmental quality.

The first chapter reviews the literature on the enforcement of environmental regulations. The second chapter examines the effect of regulatory information gaps on a firm’s compliance strategy. The theoretical results indicate that a firm with a sufficiently low probability of being subject to enforcement action will delay compliance. This prediction is tested empirically in the context of nutrient management regulations in Maryland. The econometric results indicate that the probability of being included in the MDA farm registry is associated with a statistically significant increase in the probability of being in compliance with nutrient management regulations.

If information gaps have an effect on a firm’s compliance decision, then they may potentially have consequent effects on ambient environmental quality. In the third chapter, I develop a theoretical model of the firm’s optimal level of emissions under information gaps. The theoretical results indicate that the optimal level of emissions is decreasing in the likelihood of being known to the regulator. If decreases in a firm’s emissions result in decreases in ambient pollution levels, then ambient pollution levels are also decreasing in the probability of being known. I test this prediction empirically within the context of Clean Water Act (CWA) permit regulations. The empirical results indicate that a one percentage point increase in the share of firms known to the regulator results in a 0.43% - 0.49% percent decrease in ambient pollutant concentration for three out of the four pollutants. Increasing the share of known firms by 5 percentage points could lead to benefits, in terms of improved water quality, of $165.9 million per year.