| Traditionally, models of environmental regulation have concentrated on the effects regulations have on firm behavior. However, firms are also able to influence regulators. Such influence appears to be welcome by the US Environmental Protection Agency as evidenced by an increasing number of programs offering some reward to firms that undertake "voluntary" environmental activities. This dissertation addresses the effects firms have on regulators. In Chapter 2, I present a model of strategic interaction between a regulator that monitors polluting activities and a representative firm. I show that the firm will make more investments in "the environment" than it otherwise would when the regulator is responsive to the firm's activity. Note that, in this research, responsiveness does not indicate a regulator's responsiveness to a firm's lobbying efforts, but rather reflects how firms are able to influence optimal enforcement allocations made by the regulator. Moreover, I find that "overinvestment" can occur and may thereby reduce social welfare. Since the regulator's response is critical to the model, in Chapter 3 I empirically test for regulatory responsiveness. Focusing on state environmental compliance inspection activities, I find that (a reasonable proxy for) voluntary environmental investments lead to subsequent inspection reductions. In Chapter 4, I extend the theoretical model to include multiple firms. I find that each firm's environmental investments cause the regulator to divert monitoring efforts towards other firms, thereby placing firms in a "prisoners dilemma" where firms have incentives to impose increased monitoring costs on one another. Consequently, each firm will undertake more environmental investment. In my empirical analysis I find that a firm's share of inspections is indeed influenced not only by its environmental investments, but also by investments undertaken by rival firms. In Chapter 5, regulatory responsiveness is broadened to address environmental permit issuance. Using duration analysis, I empirically test the hypothesis that firms' good environmental stewardship facilitates permit issuance. My results generally support this hypothesis. This reduction in permitting times can represent substantial cost savings for a company. Importantly, this analysis offers an explanation for why we observe relatively high compliance rates even though inspections are infrequent and penalties for noncompliance low. |
