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 analyze the effects of environmental policies on the size distribution of firms. We model a stationary industry where the observed size distribution is a solution to the profit maximization problem of heterogeneous firms that differ in terms of their energy efficiency. We compare the equilibrium size distribution under emission taxes, uniform emission standards, and performance standards. Our results indicate that, unlike emission taxes and performance standards, emission standards introduce regulatory asymmetries favoring small firms.