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Uncertain Penalties and Compliance

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Listed:
  • Marcelo Caffera
  • Carlos Chávez
  • Carol Luengo

Abstract

We present the results of a series of laboratory economic experiments designed to study compliance behavior of polluting firms when information on the penalty is uncertain. The experiments consist of a regulatory environment in which university students face emission standards and an enforcement mechanism composed of audit probabilities and penalties (conditional on detection of a violation). We examine how uncertainty on the penalty affects the compliance decision and the extent of violation under two enforcement levels: one in which the regulator induces perfect compliance and another one in which it does not. Our results suggest that in the first case, uncertain penalties increase the extent of the violations of those firms with higher marginal benefits. When enforcement is not sufficient to induce compliance, the uncertain penalties do not have any statistically significant effect on compliance behavior. Overall, the results suggest that a cost-effective design of emission standards should consider including public and complete information on the penalties for violations.

Suggested Citation

  • Marcelo Caffera & Carlos Chávez & Carol Luengo, 2019. "Uncertain Penalties and Compliance," Documentos de Trabajo/Working Papers 1907, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
    • Handle: RePEc:mnt:wpaper:1907
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    References listed on IDEAS

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    More about this item

    Keywords

    uncertainty; penalty; emission standard; economic experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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