How Does the Deterrence Effect of Regulatory Enforcement Differ Between Privately and Government-Owned Facilities?

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Overview:

Environmental protection laws apply to both privately owned and government-owned facilities, and regulatory agencies take enforcement actions against them to induce compliance. This study investigates whether privately-owned and government-owned facilities respond differently to inspections and enforcement actions. While the U.S. Clean Water Act (CWA) provides a uniform legal framework, regulated entities may respond differently depending on their institutional objectives. This study provides empirical evidence on whether regulators should differentiate their enforcement strategies by facility ownership to maximize social welfare and environmental protection.

Methodology:

The study examines compliance with the U.S. CWA between September 1997 and January 2016.

Data Sources: The researchers used monthly data on major facilities across all sectors in six U.S. states, representing over one-third of all such facilities nationwide. Data included state enforcement actions from state agency databases and federal actions from an EPA database.
Sample Composition: The sample included 728 privately owned facilities and 1,787 government-owned facilities, comprising 1,346 municipal wastewater treatment facilities ( publicly-owned treatment works) and 441 other government-owned facilities, such as public hospitals and power plants.
Regulatory Metrics: The researchers distinguish between two types of regulatory interventions:
- Inspections: Monitoring activities used to help document non-compliance.
- Enforcement Actions: Legal or administrative "punishments" intended to penalize violations.
Analytical Approach: The researchers performed fixed-effects and random-effects panel regressions to estimate the influence of ownership on deterrence. The analysis explored both effluent limit violations, which illegally degrade water quality, and reporting violations.

Context:

The CWA controls wastewater discharges from "point sources" through facility-specific permits that identify pollutant-specific discharge limits. Both inspections and enforcement actions represent regulatory pressure intended to induce compliance with these limits.

The study draws upon the economic theory of marginal deterrence, which posits that regulated entities adjust their compliance behavior based on the expected costs of noncompliance, specifically the probability of detection through inspections and the severity of enforcement actions.¹,²

The researchers hypothesize that the response to these regulatory pressures may diverge due to fundamental differences between privately owned and government-owned facilities' objective functions and constraints.

Findings:

The findings of this research demonstrate significant differences in how ownership structure influences compliance behavior and the effectiveness of regulatory pressure.

The statistical analysis reveals that government-owned facilities exhibit a clear and statistically significant specific deterrence effect. Specifically, an enforcement action directed at a government facility is associated with a measurable reduction in future violations. This suggests that regulatory interventions against government-run infrastructure are effective at improving environmental performance.

In contrast, the analysis found no significant deterrence effect from enforcement actions against privately-owned facilities in this sample. This lack of a measurable response suggests that the current actions may not be sufficient to alter private firms in the same way it does for public entities. No inherent operational differences arise from ownership type that affect reporting compliance, ensuring that the differences we observe in deterrence between privately and government-owned facilities stem solely from environmental management differences.

The research also highlights a disparity in oversight intensity. Despite generating more effluent violations, municipal treatment facilities receive enforcement actions more frequently than their private counterparts. This indicates that regulators may target public entities more aggressively or find them more amenable to legal correction. Furthermore, distinct violation patterns emerged: municipal treatment facilities struggle more with operational effluent limits, but they are much more diligent than private facilities in reporting violations.

Key Takeaways:

Government-owned non-municipal treatment facilities receive less attention than privately owned facilities.
Municipal treatment facilities generate more effluent violations than privately owned facilities.
Government-owned non-municipal treatment facilities generate fewer effluent violations, and most results show that government- owned facilities respond more strongly to regulatory interventions than privately owned facilities do.
Results imply that forces beyond managers’ control affect the effluent violations of publicly-owned treatment works facilities. However, more broadly, non-financial and institutional forces may motivate facility managers to achieve better environmental performance and respond more strongly to regulatory interventions.

Authors:

Dietrich Earnhart, Ph. D., director of the Center for Environmental Policy, professor of economics, University of Kansas, earnhart@ku.edu

Sarah Jacobson, Ph. D., professor of economics, Williams College, saj2@williams.edu

References:

¹Wilson J, Rachal P. Can the government regulate itself? Public Interest. https://www2.lib.ku.edu/login?url=https://www. proquest.com/magazines/can-government-regulate-itself/docview/1298105804/se-2

²Konisky D, Teodoro M. When governments regulate governments. American Journal of Political Science. https:// doi.org /10.1111/ajps.12221

Learn More:

The full version of this paper was published in Springer Nature. https://doi.org/10.1007/s10640-024-00940-4

Support from the Institute for Policy & Social Research, University of Kansas, ipsr.ku.edu