The Environmental Consequences of Pay Inequality

Abstract

Using individual compensation data on attorneys at the Environmental Protection Agency (EPA), we find that pay gaps among regulators affect the environment. Consistent with incentive theories, higher pay gaps within the EPA lead to more enforcement actions with higher monetary penalties, especially against severe misconduct. Exploiting the differential exposure of facilities to the EPA's regional offices, we find that facilities in high-inequality jurisdictions reduce pollution levels, slow production and initiate abatement activities. The results suggest that the regulator's compensation structure creates an enforcement risk which is internalized by regulated entities.

Keywords: Pollution, incentives, regulation, compensation

JEL Classification: K32, Q58, M52