The Effect of Incomplete Enforcement Information on Ambient Pollution Levels: Evidence from the Clean Water Act (Job Market Paper)

Firms will comply with a regulation when the expected benefits of compliance exceed the expected costs. If the regulator has incomplete enforcement information and firms are aware of this, it will enter into their calculation of expected compliance benefits and costs. The literature on regulatory enforcement generally assumes that the regulator is able to identify the universe of regulated firms. This paper relaxes this assumption by allowing for the existence of regulatory information gaps and develops a theoretical model of the firm’s optimal level of emissions under such conditions. The theoretical results indicate that the optimal level of emissions is decreasing in the likelihood of being known to the regulator. I analyze this effect empirically within the context of Clean Water Act (CWA) permit regulations in the Mississippi River Basin. I combine geospatial data on stream networks with census, water quality, and weather data to construct a panel dataset. Then, I estimate a spatial lag model of nitrogen, sulfate, chromium, and phosphorus concentration as a function of the share of firms known to the regulator, upstream delivery of the pollutant, point-source pollutant contribution, population, inspections as well as catchment, month, and year fixed effects. The results indicate that a one percentage point increase in the share of firms known to the regulator results in a 0.20% – 2.15% percent decrease in ambient pollution levels for three out of the four pollutants. Increasing the share of known firms by 5 percentage points could result in benefits, in terms of improved water quality, of $67.9 million per year.

Works in Progress

Andarge, Tihitina & Erik Lichtenberg (2019). “Regulated Firm Strategy under Enforcement Gaps,” University of Maryland, College Park. October (submitted to the Journal of Regulatory Economics)

Andarge, Tihitina & Catherine Ragasa (2019). “The Effect of Information Receipt on Livelihood Diversification: Evidence from Malawi,” International Food Policy Research Institute (IFPRI), Washington, DC.

Albrecht, Tamee, Tihitina Andarge, Elise Harrington, Tejasvi Hora, Andrea Lund, Rebecca Wall (2019). “River management for sustainable development on the Senegal River: integrating historical and hydrologic analysis of trade-offs between health and food, energy, and water resources,” National Socio-Environmental Synthesis Center (SESYNC), Annapolis, MD.