Enforcement Spillovers: Lessons from Strategic Interactions in Regulation and Product Markets

Abstract

We explore mechanisms driving enforcement spillovers - when sanctions at one entity influence behavior at other entities. Our model illustrates when spillovers arise from a regulatory channel and when they arise from a channel not emphasized in the existing literature: product markets. Using facility-by-month data from Clean Water Act manufacturers, we find that penalties generate strong positive spillovers for other facilities facing the same authority. We find suggestive evidence that penalties generate negative spillovers for facilities in the same industry but facing a different authority. Results are consistent with spillovers driven by strategic interactions in both regulation and product markets.

Keywords: general deterrence, strategic substitutes, strategic complements, pollution policy

JEL Classification: K42, L51, Q58