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Enforcement Spillovers: Lessons from Strategic Interactions in Regulation and Product Markets

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  • Mary F. Evans
  • Scott M. Gilpatric
  • Jay P. Shimshack

Abstract

We explore enforcement spillovers, in which sanctions at one entity influence behavior at other entities. We model spillovers arising from a regulatory channel and from a channel not previously emphasized: product market interactions. Our model motivates empirical hypotheses, which we test using data from manufacturers subject to the Clean Water Act. We find that penalties create positive spillovers for other facilities facing the same regulatory authority, such that enforcement actions reduce pollution at facilities in the same regulatory jurisdiction. However, penalties generate negative spillovers for facilities in the same industry facing a different authority, such that enforcement actions increase pollution at facilities in the same industry but facing a different regulator. Reductions in pollution in a state issuing a fine are about 50 percent offset by increases in pollution in nearby states. Negative spillovers to entities outside of the jurisdiction can be thought of as enforcement leakage.

Suggested Citation

  • Mary F. Evans & Scott M. Gilpatric & Jay P. Shimshack, 2018. "Enforcement Spillovers: Lessons from Strategic Interactions in Regulation and Product Markets," Journal of Law and Economics, University of Chicago Press, vol. 61(4), pages 739-769.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/700281
    DOI: 10.1086/700281
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    Cited by:

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    3. Earnhart, Dietrich & Friesen, Lana, 2021. "Use of competitive endogenous audit mechanisms by federal and state inspectors within environmental protection agencies," Journal of Environmental Economics and Management, Elsevier, vol. 109(C).
    4. Xiaomeng Charlene Chen & Ka Wai Choi & Sue Wright & Hai Wu, 2023. "The effectiveness of sanctions on disclosure regulation: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 3841-3872, December.
    5. Blundell, Wesley & Evans, Mary F. & Stafford, Sarah L., 2021. "Regulating hazardous wastes under U.S. environmental federalism: The role of state resources," Journal of Environmental Economics and Management, Elsevier, vol. 108(C).
    6. M. Martin Boyer & Philippe d'Astous, 2023. "Tax compliance and firm response to electronic sales monitoring," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1430-1468, November.
    7. Berlinski, Samuel & Gagete-Miranda, Jessica, 2024. "Enforcement Spillovers under Different Networks: The Case of Quotas for Persons with Disabilities in Brazil," IDB Publications (Working Papers) 13681, Inter-American Development Bank.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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