Uncertain Penalties and Compliance

Produced by: 
Munich Personal RePEc Archive
Universidad de Montevideo
Available from: 
December 2018
Paper author(s): 
Carol Luengo
Marcelo Caffera
Carlos Chávez
Topic: 
Environmental Economics
Year: 
2020

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.

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