Enforcement Leverage with Fixed Inspection Capacity | Zendy

Lirong Liu | Zendy; William S. Neilson | Zendy

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Enforcement Leverage with Fixed Inspection Capacity

Author(s) -

Lirong Liu,

William S. Neilson

Publication year - 2013

Publication title -

strategic behavior and the environment

Language(s) - English

Resource type - Journals

eISSN - 1944-012X

pISSN - 1944-0138

DOI - 10.1561/102.00000034

Subject(s) - leverage (statistics) , enforcement , incentive , business , industrial organization , leverage effect , context (archaeology) , competition (biology) , constraint (computer aided design) , order (exchange) , microeconomics , computer science , finance , economics , engineering , artificial intelligence , political science , law , mechanical engineering , volatility (finance) , paleontology , ecology , biology , autoregressive conditional heteroskedasticity

We expand the optimal targeting enforcement literature to allow regulator inspection capacity constraints. A fixed number of firms are selected for inspection and those with the highest emissions are targeted with higher inspection probability. This structure induces dynamic rank-order tournaments among inspected firms, and pollution abatement incentives from the leverage effect are enhanced by a competition effect. Simulations suggest that targeted firms should be inspected with high probability and that about 2/3 of inspections should be allocated to targeted firms. However, even suboptimal allocations of inspections and firms to the targeted and untargeted groups can outperform static enforcement schemes.

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