A New Method of Random Sampling to Reduce the Cost of Regulatory Monitoring

Abstract

This Article proposes a new method of reducing the costs administrative agencies incur in monitoring regulatory compliance by a firm that operates multiple sources of risk, such as air-polluting smokestacks. The expense of individually monitoring such sources directly may consume a large share of the agency's enforcement budget. Under our proposal, regulators would instead randomly select one of the firm's sources of risk, determine the firm's liability at that source, and apply that outcome perforce as determinative of liability at all of the sources. The proposal significantly reduces monitoring costs because agencies need to monitor only one source of risk to replicate the deterrence generated by the source-by-source approach that regulators currently use. To indicate the potential benefits, we apply the proposal to EPA monitoring of compliance with regulations limiting pollution under the Clean Air Act. We also address potential risk-bearing and judgment-proof costs associated with the use of our proposal and explain how both problems can be solved.

JEL Classification: A1, A10, K00, K10, K13, K23, K32, K41