Formal and Informal Regulations: Enforcement and Compliance

University dissertation from University of Gothenburg

Abstract: The question I address in the thesis is how cooperation in social dilemma situations and compliance with environmental regulations are determined by legal enforcement, intrinsic motivations and culture. In light of this, the thesis consists of five independent chapters. Chapter 1 analyzes the effects of the interaction between technology adoption and incomplete enforcement on the extent of violations and the rate of abatement technology adoption. We focus on price-based and quantity-based emission regulations. First, we show that in contrast to uniform taxes, under tradable emissions permits (TEPs), the fall in permit price produced by technology adoption reduces the benefits of violating the environmental regulation at the margin and leads firms to modify their compliance behavior. Second, we show that the regulator may speed up the diffusion of new technologies by increasing the stringency of the enforcement strategy in the case of TEPs while in the case of uniform taxes, the rate of adoption does not depend on the enforcement parameters. In Chapter 2, I study the effects of targeted monitoring strategies on the adoption of a new abatement technology and, consequently, on the aggregate emissions level when firms are regulated with uniform taxes. My results suggest that a regulator aiming to stimulate technology adoption should decrease the adopters’ monitoring probability and/or increase the non-adopters’ monitoring probability. In contrast to previous literature, I find that, in some cases, a regulator whose objective is to minimize aggregate emissions should exert a stronger monitoring pressure on firms with higher abatement costs. In some contexts, weak law enforcement results in only a fraction of detected transgressors actually being sanctioned. The standard theoretical models of enforcement predict that, as long as the joint probability of detection and sanction is constant, the extent of violations does not vary with different combinations of the probability of monitoring and the probability of sanction given detection. In contrast, in Chapter 3 we propose an alternative theoretical model that predicts that the extent of violation is sensitive to such combinations, i.e., these two probabilities are not perfect substitutes. By using a laboratory experiment, we investigate the hypothesis of imperfect substitutability of monitoring and sanctioning probabilities. Our subjects include both environmental managers in Colombian firms and university students. Different combination of the probabilities resulting in the same joint probability of detection and sanctioning did not affect the violation behavior among managers, while students violate relatively less when facing a higher sanctioning probability for a given joint probability. Chapter 4 investigates whether disclosure crowds out pro-social behavior using a public goods experiment. In a between-subject design, we investigate different degrees of disclosure. We find a small positive but insignificant effect of disclosure treatments on contributions to the public good. Thus, our empirical findings are consistent crowding-out theory. In contrast to previous studies on cross-group comparisons of conditional cooperation, in Chapter 5 we keep cross- and within-country characteristics constant. The results reveal significantly different cooperation behavior between social groups in the same location.

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