What Makes Companies Behave? An Analysis of Criminal and Civil Penalties Under Environmental Law

Abstract

This analysis examines civil and criminal actions against companies and their employees. Using data on all EPA federal regulatory actions against US companies for violations of environmental law from 1970 to 1997, a nonparametric approach is employed to estimate recidivism probabilities and impacts of various types of regulatory actions. The analysis suggests that, at current monetary fine levels, civil lawsuits against firms are not more effective at reducing repeat offenses (recidivism) than administrative actions which carry much lower fines. In contrast, criminal lawsuits signifcantly reduce recidivism. There is also evidence of a dynamic liability effect where civil lawsuits against companies with one or more priors carry higher fines and signifcantly reduce recidivism. Since traditional models are not equipped to address such issues, a model of company behavior under regulation is presented. Downward pressure on the level of the regulated activity emerge due to; risk asymmetry between owner and manager, legal liability, and limited contracting. In particular, limits on owners' ability to contract with employees in the event of criminal action may serve as an explanation for the apparent power of such enforcement over future company behavior. Several models of regulator behavior and their implications for regulatory effectiveness are also considered.

Keywords: crime, white collar crime, corporate crime, punishment, compliance, recidivism, management, fines, corporate behavior, agency, enforcement, envrionment, treatment, nonparametric, executive, contract, regulation, risk

JEL Classification: C14, D82, K00, L51, Q28