Enforcement Missions: Targets vs Budgets

Abstract

Enforcement of policy is typically delegated. What sort of mission should the head of an enforcement program be given? When there is more than one firm being regulated their compliance decisions - otherwise completely separate - become linked in a way that depends on that mission. Under some sorts of missions firms compete to avoid the attention of the enforcer by competitive reductions in the extent of their non-compliance. Under others the interaction pushes in the opposite direction. We develop a general model or enforcement spillovers that allows for the ordering of some typical classes of missions. We find that in plausible settings 'target-driven' missions (that set a hard emissions target and flexible budget) achieve the same outcome at lower cost than 'budget-driven' ones (that fix budget). Inspection of some fixed fraction of firms is never optimal.