Hansen, Lars Gårn3; Jensen, Frank3; Nøstbakken, Linda4
1 Section for Environment and Natural Resources, Department of Food and Resource Economics, Faculty of Science, Københavns Universitet2 Norwegian School of Economics3 Section for Environment and Natural Resources, Department of Food and Resource Economics, Faculty of Science, Københavns Universitet4 Norwegian School of Economics
self-reporting and differentiated inspections
Quotas are frequently used in the management of renewable resources and emissions. However, in many industries there is concern about their basic effectiveness due to non-compliance. We develop an enforcement model of a quota-regulated resource and focus on a situation with significant non-compliance and exogenous constraints on fines and enforcement budget. We propose a new enforcement system based on self-reporting of excess extraction and explicit differentiation of inspection rates depending on compliance history. We use differentiated inspections to induce firms to self-report excess extraction. This system increases the effectiveness of the quota by allowing the regulator to implement a wider range of aggregate extraction targets than under traditional enforcement, while ensuring an efficient allocation of extraction. In addition, inspection costs can be reduced without reductions in welfare.
Environmental and Resource Economics, 2014, Vol 58, Issue 4, p. 539-562