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Regulation and Leakage

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Independence Ballroom II
Hosted By: Association of Environmental and Resource Economists
  • Chair: Mar Reguant, Northwestern University

Escalation of Scrutiny: The Gains from Dynamic Enforcement of Environmental Regulations

Wesley Blundell
California State University-East Bay
Gautam Gowrisankaran
University of Arizona
Ashley Langer
University of Arizona


Defining an enforcement policy is a key component of reducing harmful
industrial emissions through regulation, yet there is little empirical evidence for what
characterizes an effective strategy. Current policy is characterized by the use of statedependent
enforcement, or steeply increasing penalties according to a firm's previous
violation history. However, empirical evaluation of state-dependent enforcement has
been hampered by the fact that under this policy, firms respond to both today's penalties
and tomorrow's future expected penalties.

This paper estimates the effect of state-dependent enforcement on compliance
with the Clean Air Act using data on plant-level enforcement, emissions, and investment
from the U.S. manufacturing sector. Using a dynamic structural model of firm investment
in environmental remediation over time, I examine alternative enforcement strategies for
reducing emissions that meet current constraints on the number of inspections, warnings,
fines, and penalties collected. The model utilizes a unique identification strategy that
exploits exogenous variation in the ratio of state regulatory budgets to enforcement
caseloads over time. That also allows for unobserved time-variant heterogeneity in plant
investment costs.

I find that: (i) If penalties were no longer dependent on a plant's previous
violation history, overall noncompliance would increase from 27% to 33%; (ii) There are
significant emissions reductions associated with increasing the penalties for plants with
the worst violation history, while lowering the expected penalties for all other plants; and
(iii) There would be an increase in aggregate emissions if the criteria for firms to receive
the maximum penalty was weakened.

Outside of air pollution, the empirical framework and results contribute to a
number of additional settings where state-dependent enforcement is practiced. These
settings include the use of watch lists for the Resource Conservation and Recovery Act,
enforcement of the Clean Water Act, and spill monitoring practices for oil wells in North

Environmental Policies, Agricultural Displacement and Deforestation Leakage: A Causal Study in the Brazilian Legal Amazon

Fanny Moffette
University of Wisconsin-Madison
Holly Gibbs
University of Wisconsin-Madison


Does environmental policy aiming to reduce deforestation induce displacement of existing agricultural activities? We exploit a natural experiment in Brazil to shed light on this question. Using a spatial discontinuity design, we examine whether or not the Soy Moratorium and the Zero Deforestation Cattle Agreements in the Brazilian Amazon have displaced production into neighboring regions. Our results show evidence that the Soy Moratorium induced soy spillovers onto previously cleared land - mainly pasture - in the less regulated ecosystem. The Cattle Agreements, which were implemented three years after the Soy Moratorium, caused increased competition for land as they pushed cattle production into areas where soy had previously expanded and resulted in increased deforestation.

Citizen Complaints, Regulator Behavior, and Air Pollution Emissions: Evidence From Texas

Jay Shimshack
University of Virginia
Mary Evans
Claremont McKenna College


Every major environmental statute allows citizens to submit complaints to pollution authorities.
The conventional wisdom is that complaints enhance regulatory effectiveness and efficiency by bringing
attention to problems undetected by costly public monitoring. However, the extent to which complaints
actually impact agency and polluter behavior remains poorly understood.

This is the first paper to analyze the causes and consequences of citizen complaints for industrial
emissions under the Clean Air Act (CAA). Three things bear noting. First, it is not actually obvious if and
how complaints will influence regulator or facility behavior. Regulatory agencies receive thousands of
complaints of uncertain reliability. Citizen complaints might crowd out or crowd in public monitoring.
Second, citizen complaints are fundamental mechanisms of accountability in governance, for both
regulated entities and regulators. If the inclination to lodge complaints increases with education,
complaints may represent an alternative mechanism for explaining observed positive correlations between
education and environmental public goods (Botero, Prince, Shleifer 2013). Third, complaint channels
offer opportunities for “next generation compliance” tools that leverage public pressures to achieve more
compliance with lower resource outlays.

We explore the determinants of CAA citizen complaints, as well as the causal effects of those
complaints on public regulator behavior and on air pollution emissions. We first develop a conceptual
framework. We then explore empirical predictions using a novel dataset on more than 50,000 citizen
complaints filed with the Texas DEQ between 2003 and 2014. We combine complaint data with facilitylevel
establishment characteristics, emissions, compliance, enforcement, and investigations data for the
universe of over 115,000 regulated point sources operating in Texas. We take several empirical
approaches, including a strategy that exploits variation in wind speed and direction for identification. The
identifying assumption is that wind conditions contribute to variation in observed complaints but
plausibly not to direct variation in other outcomes.

Bag "Leakage": The Effect of Disposable Carryout Bag Regulations on Unregulated Bags

Rebecca Taylor
University of Sydney


Governments often regulate the consumption of products with negative externalities. Leakage occurs when partial regulation results in increased consumption of these products in unregulated parts of the economy, undermining the benefits from the regulations. This article quantifies leakage from an increasingly popular environmental policy—the regulation of disposable carryout bags (DCB). In California, DCB policies prohibit retail food stores from providing customers with thin plastic carryout bags at checkout and require stores to charge a minimum fee for paper carryout bags. However, all remaining types of disposable bags are unregulated (e.g., garbage bags, food storage bags, paper lunch sacks). Using quasi-random variation in local government policy adoption in California from 2008-2015, I employ an event study design to quantify the effect of bag regulations on the consumption of plastic and paper carryout bags, as well as the consumption of other disposable bags. The results show that a 44 million pound reduction of plastic from the elimination of plastic carryout bags is offset by an additional 16 million pounds of plastic from increased purchases of garbage bags (i.e., sales of small, medium, and tall garbage bags increase by 67%, 50%, and 5%, respectively). Additionally, DCB policies lead to a 61 million pound increase in paper carryout bags used annually. Altogether, I show that DCB policies are shifting consumers towards fewer but heavier bags. I conclude by discussing the environmental implications of policy-induced changes in the composition of plastic and paper bags, with respect to carbon footprint, landfilling, and marine pollution.
Mar Reguant
Northwestern University
Eduardo Souza-Rodrigues
University of Toronto
Lucija Muehlenbachs
University of Calgary
Enrique Seira Bejarano
Mexico Autonomous Institute of Technology
JEL Classifications
  • Q5 - Environmental Economics