State-Dependent Enforcement to Foster the Adoption of New Technologies

Abstract: Harrington (J Public Econ 37: 29-53, 1988) shows that a suitable strategy for regulators to make enforcement more efficient is to target surveillance resources according to past compliance records. Such scheme generates enforcement leverage as non-compliance triggers greater future scrutiny increasing the expected costs of non-compliance beyond the avoidance of immediate fines. In this paper, we propose an improved transition structure for the audit framework, in which targeting is based not only on firms' past compliance record but also on adoption of environmentally superior technologies. We show that this transition structure would not only foster the adoption of new technology but also increase deterrence by changing the composition of firms in the industry toward an increased fraction of cleaner firms that pollute and violate less.