Designing Cooperation: Agency Design, Credible Commitment and Regulatory Compliance

Abstract

To cultivate optimal compliance levels, regulatory officers can engage in "cooperative enforcement" to signal their willingness to tradeoff minor violations for firms' willingness to address major ones. The promise of cooperative enforcement, however, is risky for firms in the absence of a credible commitment device that lowers the likelihood of an agency reneging on its pledge. I argue that agency design choices on two dimensions, regional scale and decentralization of authority, can ease firms' concerns by signaling an agency's intention to credibly commit itself to cooperative enforcement. To test this expectation, I use data on individual-firm compliance in air pollution control in each of the fifty U.S. states along with data on two agency design features to characterize the regulatory environment in each state agency's regional office. Results suggest that these design features operate jointly as commitment devices, securing higher cooperation among firms compared to any other institutional combination.

Keywords: Credible Commitment, Regulatory Compliance, Environment, Regulation

JEL Classification: H7, K2