Do Regulators Respond to Voluntary Pollution Control Efforts? A Count Data Analysis

I. INTRODUCTION It is well understood that, at least in the United States, inspections conducted by regulators to ascertain the compliance status of firms are quite infrequent (Cohen, 1998; Russell, 1990b). Nonetheless, many studies show that such activities do influence firms' compliance behavior. Laplante and Rilstone (1996), for instance, find that both inspections and the threat of inspections by regulatory authorities result in lower emissions. Moreover, they find that inspections induce more frequent self-reporting (and, by assumption, more self-auditing) by regulated plants. Gray and Deily (1996) find that inspections positively influence compliance rates for plants in the U.S. steel industry. Nadeau (1997) finds that monitoring and enforcement activities reduce the duration of noncompliance for plants in the pulp and paper industry. Weil (1996) finds that inspections for compliance with the Occupational Safety and Health Administration's machine guarding standards in custom woodworking establishments significantly improve compliance rates. Hence, despite infrequent monitoring, inspections and enforcement actions do seem to influence the compliance behavior of firms. To better understand firms' compliance behavior, it is essential to understand what determines inspection and enforcement activity. The focus of this article, then, is on what influences environmental regulators to conduct costly inspections. There is a small but growing body of empirical literature that addresses this issue, which includes studies by Magat and Viscusi (1990), Deily and Gray (1991), Dion et al. (1998), Helland (1998a), and Firestone (2002). Cohen (1998) presents an extensive survey of this literature, highlighting some of the key findings of these studies. The goal in this article is to build on these studies by addressing an issue that to this author's knowledge hasn't been researched yet. That is, an attempt is made here to test a "responsive regulation" hypothesis. This hypothesis, advanced by Hemphill (1993/94) and Cothran (1993) and formally modeled by Maxwell and Decker (2004), asserts that firms may undertake voluntary environmental pollution reductions to receive reduced regulatory scrutiny, such as fewer inspections. (1) The rationale for why a regulator may behave in a responsive way can be addressed from a couple of perspectives. (2) For instance, overtures on the part of regulatory authorities themselves suggest responsive regulation. Programs like the U.S. Environmental Protection Agency's (EPA's) StarTrack Program, for instance, focus on providing incentives for firms to voluntarily increase compliance activities with respect to existing environmental regulations. Such incentives explicitly include a lower inspection priority for participating firms. The StarTrack program is similar to recently announced audit practice changes at the EPA, outlined in Audit Policy: Incentives for Self-Policing (1998b). This enforcement policy encourages regulated entities to voluntarily discover, disclose, and correct violations of existing environmental statutes. In exchange for these increased compliance efforts, the EPA will eliminate gravity-based penalties, abstain from pursuing criminal prosecution, and refrain from additional audit requests. (3) Examples of responsive regulation are not limited to the national level either (see, e.g., Cothran, 1993; Hemphill, 1993/94). Therefore, some voluntary environmental investments are motivated either by explicit or implicit regulatory commitments to reward the firm by relaxing regulatory intensity. Maxwell and Decker (2004) formally model this regulatory behavior using a two-stage game theoretic model where the regulator wishes to minimize the expected cost to the environment from noncompliance (as well as monitoring and enforcement costs) and a representative firm desires to minimize the expected cost of environmental compliance. The model shows that if a firm makes an observable, irreversible environmental investment, prior to the regulator's allocation of inspection resources, then the regulator will reduce subsequent inspection efforts at that firm. …