Regulatory dealing - Revisiting the Harrington paradox

Despite the fact that (i) when the EPA observes regulatory violations it rarely pursues the violator and, (ii) the expected penalty faced by a violator who is pursued is small compared to the cost of compliance, it is still the case that, (iii), firms comply a significant portion of the time. Winston Harrington (Harrington, W., 1988. Enforcement leverage when penalties are restricted. Journal of Public Economics 37, 29-53) provides a dynamic model consistent with this apparent paradox. We offer an alternative rationalisation in a model of "regulatory dealing" in which the agency uses tolerance in some contexts to induce increased compliance in others. The observed tolerance of the EPA to non-compliance may be a strategic response by the agency to a difficult enforcement environment rather than evidence that it has "gone soft" on pollution or been captured by industry interests. We use the model to consider the impact of the growing trend towards citizen suits and NGO enforcement of regulation, arriving at some unconventional conclusions. We argue that the model is consistent with existing empirical analyses.