Dynamic Regulation with Firm Linkages: Evidence from Texas
Department of Economics
Arizona State University
Friday, March 3, 2023
12:00 pm-1:15 pm
Taylor-Hibbard Seminar Room (Rm103)
We evaluate the efficiency of linked environmental regulation. Linked regulation allows inspectors who uncover violations at one plant to increase enforcement at other plants that share a common owner. When compliance costs are correlated, regulators can then target scarce enforcement resources towards bad actors without inspecting everyone. In this paper, we develop a framework of dynamic moral hazard under linked regulation. Plants choose pollution mitigation efforts, while regulators selectively target based on scores. Our framework allows for large portfolios of plants and for choices to be interdependent within the portfolio of plants and across time. We apply the framework to the Texas Commission on Environmental Quality (TCEQ) who uses a scoring-based system of linked regulation to enforce environmental regulations. One score reflects each plants' compliance history, allowing enforcement to target past violators, while the other score reflects the compliance history for all plants owned by the same firm, allowing enforcement to be linked across co-owned plants. We evaluate this program using a novel panel of plant inspections, violations, and scores. We use our estimated model to evaluate the efficiency of linked regulation compared to alternative regimes.