Understanding Disparities in Punishment: Regulator Preferences and Expertise

Abstract

We exploit institutional changes in the enforcement of water quality regulations in California to identify and estimate a model of adverse selection where the regulator considers private benefits and external costs from violations, as well as enforcement costs. Using the estimated model, we find that, even if the regulator's objective function were the same across dischargers, differences in the punishment of violations would mostly persist, reflecting a large heterogeneity in the dischargers' private benefits. Moreover, introducing a one-size-fits-all policy would increase both the level and dispersion of violation frequencies, illustrating the value of employing the regulator's knowledge about dischargers.