MODALIDAD DE LA INVESTIGACIÓN

The previous chapters describe the socially optimal enforcement policy which enforcement authorities should adopt in order to obtain socially optimal lev- els of precaution. Two important assumptions were made that have not, so far, been discussed. First of all, it was assumed that the enforcement authority can commit itself to the enforcement policy that it has announced. Secondly, it was assumed that the enforcement authority will seek to maximize social welfare. Both assumptions may be problematic and are therefore examined in this chapter. Essential to this analysis is the recognition that the decision to prosecute a violation is not fixed, exogenous, but depends on the firm’s decision to comply (Tsebelis, 1989). The enforcement authority is a strategic player with its own objectives and incentives. Therefore, the firm’s decision to comply is the result of a strategic interaction between the firm and the en- forcement authority.

Section 9.1 investigates the credibility problem. Section 9.2 investigates the objectives of law enforcers. Section 9.3 discusses the role of courts in con- trolling enforcement authorities.134

9.1 Credibility and commitment

It cannot be taken for granted that the enforcement authority will be able to commit itself to the efficient enforcement policy. First, commitment is difficult if circumstances have changed so that expected harm and compliance costs have changed and so that punishing or remedying non-compliance is no lon- ger efficient (section 9.1.1). Secondly, such commitment may be impossible because enforcement is costly (section 9.1.2).

9.1.1 The problem of commitment when the costs and benefits of non-

compliance change

Kydland and Prescott (1977) show that it is sometimes better not to allow pol- icy makers discretion to act in accordance with what is in society’s best inter- est, but to provide them with long-term rules which are difficult to change.

134 The analysis in this chapter is presented in Suurmond and Van Velthoven (2006*) while discussing the desirability of a duty to enforce for municipalities [beginselplicht tot handhav- ing].

Otherwise, a time-inconsistency, or credibility problem may arise. A credibil- ity problem arises when citizens realize that the government may, in future, use its discretion to make a new policy decision which differs (for good rea- sons) from the one in place when the policy is announced. This problem is well-known in macroeconomics. Kydland and Prescott (1977) argue that the best outcome can be achieved if policy makers are not given discretionary powers to determine the best policy for every period, but (fixed) rules, as for instance is the case with an independent central bank which is solely con- cerned with fighting inflation.

Credibility problems also occur in the case of enforcement policies. Con- sider the following example: suppose municipal by-laws prescribe that build- ings must be built in a fire-proof manner which requires that an emergency exit can be reached within 50 meters. It will probably be efficient for café proprietors to comply with this rule when they decide to build or rebuild an establishment, because the extra costs of compliance are small relative to the reduction in expected harm. Violation would lead to a loss in welfare. However, once the café is built in such a way that an exit can only be reached within, say, 60 meters; a different balance of costs and benefits is achieved. In order for the proprietor to comply, he will first have to break down the existing walls and exits, and then to rebuild the café in such a way that it satis- fies the requirements for emergency exits. In the meantime, the café will be closed, while the expected harm is only reduced by “10 meters”. It may well be that these costs of compliance are higher than the benefits, so that requir- ing compliance would in this case not be efficient. As a result of this balance of social costs and benefits, the municipality may refrain from enforcement.

However wise it may be to refrain from enforcement ex-post, the deterrent effect of enforcement is seriously weakened. If proprietors know and expect that the municipality will not enforce the rule of exits within 50 meters, they will probably not comply with this rule. If citizens expect that the enforcement authority will, in the end, not enforce the rules, they will take this freedom to act against the rules. This is socially undesirable if the offenses in question are ex-ante inefficient and the administration ex-ante wants to enforce the rules, but cannot commit itself to the promised policy. It may be difficult for enforce- ment authorities such as municipalities to carry out enforcement based on ex-ante costs and benefits because citizens are interested in current, ex-post, results. The tendency to refrain from enforcement will be higher when the ex-post costs of compliance are high, the competition for the limited enforce- ment budget is larger and offenses occur infrequently. Then social pressure against enforcement ex-post will be large, due to for instance the fear of loss of employment or loss of consumption of pleasant activities, and/or due to the underestimation by citizens of the expected harm that is inflicted.

Situations in which such credibility problems occur are very common in environmental law, especially building law, where remediation is a relevant policy objective. With remediation, the costs of compliance are higher after an offense than before.

9.1.2 Commitment when enforcement is costly

A credibility problem is present when the decision to tolerate a violation is different ex-post and ex-ante because there has been a change in expected harm and/or compliance costs once an offense has been committed. Howev- er, the credibility problem is much broader and, in principle, concerns every offense. Once an offense has been committed, the enforcement authority will not want to realize costs of enforcement because the welfare loss of the offense can not be made undone (Boadway et al., 1995; Baker and Miceli, 2005). Once a criminal has decided whether to commit a crime, given the government’s announced punishment plan, the social benefits from the enforcement policy will have been completely realized with respect to that individual or firm. The reason for realizing enforcement costs is that enforcement creates deterrence of potential offenses that might be committed in the future. Therefore, the announcement of enforcement is only credible if society and the enforcement authority are sufficiently interested in the future. Boadway et al. (1995) dem- onstrate that if the future is sufficiently important, the enforcement author- ity will have an incentive to build a reputation of strict enforcement. If the enforcement authority is not sufficiently interested in deterring future crime, it may refrain from enforcement activities ex-post.

Baker and Miceli (2005) show that credibility is especially problematic if detection and imposing sanctions are costly . Consider a static policy (i.e. without credibility problems) of some optimal probability of detection. This policy will result in enforcement costs in realizing this probability. When sanctioning happens by means of fines, the optimal dynamic policy (which takes into account the problem of credibility) causes the optimal probability of detection to fall; hence crime rates will rise, reflecting the greater weight society attaches to minimizing current enforcement costs compared to deter- ring future crimes.135 _{If, however, jail is included as a possible punishment,} credibility can result in either more or less aggressive detection and punish- ment policies, as compared to the optimal static policy. The optimal strategy depends on which policy is more likely to lower the expected enforcement costs.136

Tsebelis (1989) obtains similar results.137 _{However, he does not consider}

135 Similar results were derived in section 3.4 concerning self-reporting. Malik (1990, p. 243) recognizes the assumption that the enforcement authority is committed to its announced policy even though it realizes that the firm must have made an honest report. Friesen (2006) discusses the optimal enforcement policy when the enforcement authority updates its belief about the probability of a violation on the basis of the reports it receives. This leads, as in Baker and Miceli (2005), to a smaller probability of inspection because the enforcement authority believes that compliance-reporting firms are more likely to be com- pliant. See also Franckx (2002).

136 Along the lines discussed in section 3.2 that under imprisonment both under- and overde- terrence may occur.

the situation in which the enforcement authority and the firm act sequen- tially (because detection takes place through inspection), but simultaneously (detection by monitoring ). The enforcement authority and the firm have to simultaneously decide whether to inspect the firm respectively whether to comply with the law. The enforcement authority may prefer to enforce the law if it is violated, but due to the enforcement costs the enforcement author- ity will prefer not to enforce the law if not violated. Under these circum- stances, the optimal strategies of the enforcement authority and the firm are interdependent. If the authority enforces the law, the firms will stop violating assuming that the expected sanction is high enough; if firms stop violating the law, the authority will stop enforcing it; if the authority stops enforcing the law, the firms will violate it; if the firms violate the law, the authority will enforce it; if the authority enforces the law, then the firms will stop violating it, and so on. Tsebelis (1989) shows that under these circumstances an equilib- rium can only be found in mixed strategies, i.e. if the enforcement authority carries out inspections with some probability, and if the firm violates with some probability.

The results of Tsebelis force us to recognize that the probability with which an enforcement authority takes action is the result of a rational calculation, and not an exogenously given probability. Therefore, the decision of firms to comply given the probability that they will be inspected is not a simple deci- sion under uncertainty. The probability that the firm will be inspected is not an exogenous value, which can be determined by the government at the desired level, but it results from the interaction between the firm and the enforcement authority. Moreover, as Tsebelis (1989) discusses, an increase in the sanctions on non-compliance might – in equilibrium – not lead to an increase in the compliance rate, but to a decrease in the probability of inspection. In the short run, higher sanctions may lead to some deterrence, resulting in a higher com- pliance rate. However, once the enforcement authority observes that the law is better adhered to, it will decrease its enforcement actions, so that deterrence is weakened and the initial compliance rate is restored. If society wants to obtain a higher compliance rate, the pay-offs to be modified are not those of firms (through sanctions), but those of enforcement authorities. It is therefore important to discuss the incentives and objectives of enforcement authorities, as well as the discretion given to these authorities.

9.2 Enforcement authorities’ objectives

Up till now, it has been assumed that law enforcers try to maximize social welfare given the rules, the allocated budget and the available sanctions. In addition, the assumption was that budgets are allocated with the goal of maximizing social welfare. However, decisions concerning enforcement policies and actions are not made by “society”, but by bureaucrats and poli- ticians. Politicians allocate a budget, control the detection and prosecution

policy, and – in their role of law-makers – determine both the rules and the maximum level and design of sanctions. Given the budget and the rules, a law-enforcement authority stipulates a detailed enforcement plan, including priorities and a production level, and carries responsibility for executing the enforcement policy.

As law enforcers also happen to be human beings, they are not necessar- ily seeking efficient enforcement, but may have different, even counterpro- ductive, objectives. “A law is enforced, not by “society”, but by an agency instructed with that task. That agency must be given more than a mandate (…) to enforce the statute with vigor and wisdom. It must have incentives to enforce the law efficiently” (Stigler, 1970, p.531). Therefore, this section discusses the objectives of law enforcers as well as the financing issues they face.

9.2.1 The objectives of law enforcers

Cohen (1999) and Firestone (2002) have identified six different theories con- cerning the behavior of law-enforcement officials:

1. Social welfare maximization. As assumed up till know, this objective implies

that the enforcement authority compares the social costs and benefi ts of compliance and enforcement.

2. Violation minimization. Under this objective, the enforcement authority

tries to reduce the number of offenses (or maximize the compliance rate), without reference to the costs and benefi ts of compliance. The enforce- ment authority is interested in achieving (general) deterrence. This ob- jective corresponds to an authority with a limited enforcement budget which must compete with other functions of the authority in question. Given the budget, the authority tries to maximize compliance. The en- forcement style best fi tted to this objective is a deterrence strategy.

3. Harm minimization. The enforcement authority tries to maximize the ben-

efi ts of compliance without reference to the compliance costs. It allocates its limited budget to action taken against offenses which cause relatively high degrees of harm. In contrast to the goal of violation minimization, which involves focusing on ‘easy’ enforcement targets even if these yield relatively little harm, an enforcement authority whose goal is harm mini- mization focuses on fi rms with the highest harm reduction per euro en- forcement effort. However, this type of authority tends to ignore the costs of compliance.

4. Case maximization. The enforcement offi cials behave like (self-interested)

bureaucrats who try to maximize budgets (following theories of bureau- cratic behavior inspired by Niskanen). This implies excessive inspections instead of the minimizing of inspections proposed by Becker (1968), al- though larger budgets may also be used to create ‘paperwork’ instead of

carrying out actual enforcement actions. Such authorities will probably follow a compliance, rather than a deterrence strategy.

5. Political support maximization. The enforcement authority tries to maxi-

mize the difference between the number of supporters and the number of detractors of its enforcement policy (following for example Pelzman). For example, the authority puts the least regulatory burden on well-orga- nized, concentrated parties. The possible consequences for employment may be an important argument for decisions on enforcement actions. Less stringent enforcement is demanded when the compliance costs are high and there is a danger of plant closing and loss of employment.

6. Bias. Collective decision-making may be decided by the median voter. Therefore, enforcement policies are designed so that they most closely match the needs of the median voter. For instance, the representative voter is not informed about enforcement effort and compliance costs and will therefore choose relatively stringent regulation and enforcement. On the other hand, voters are also less able to observe the extent to which the government is enforcing its standards. We might therefore expect more stringent regulations than are socially optimal, and less than stringent enforcement to compensate.

9.2.2 The financing of enforcement authorities

The goal of enforcement officials is also determined by the financing and evaluation of the enforcement authority. If the “success” of the enforcement authority is measured by the number of cases commenced, the authority is more likely to maximize the number of cases. Similarly, if the budget of the authority is based on the budget or costs of the previous year(s), the authority may have an incentive to increase the number of cases, hence increasing its budget. In addition, the extent to which enforcement is “politicized” depends on the institutional environment. Generally, public prosecutors and courts are quite independent. Regulatory agencies may also behave as independent bodies. On the other hand, administrative enforcement by the board of mayor and aldermen might be highly influenced by citizens’ opinions.

Marette and Crespi (2005) discuss three different financing systems of enforcement authorities. First of all, the authority may be financed by gen- eral taxes. Secondly, the enforcement authority may be financed by user (or: monitoring) fees, paid by all potential violators. All regulated firms pay a fee regardless of their actions. Thirdly, an enforcement authority may be financed by the benefits of the fines paid by violating firms. Only firms that violate the rules pay. Marette and Crespi (2005) show that if it is expected that there will be some non-compliance, it is optimal to cover the authority’s enforcement actions by penalties such as fines. This provides an optimal incentive to com- ply because non-complying firms also pay for the enforcement costs. As the monitoring costs increase and a higher budget is required, the financing has

to be augmented with a lump-sum tax, rather than a fee. A fee would result in a negative incentive for complying firms. If, however, all firms are expected to comply with the standards, clearly no money can be collected through a penalty. In this case, a per-firm fee would be the optimal method of regula- tory financing. As the monitoring costs increase, the financing has to be aug- mented with a lump-sum tax.

These results may also help to understand the kind of enforcement authority which may emerge. Suppose that a public authority cannot receive penalties and a private self-regulatory body cannot receive public taxes. It then follows that if only fees are required to finance the authority, there will be no difference between a private and a public organization. Both will be able to collect the necessary budget. It may be efficient to rely on private self- regulation if the per-firm monitoring cost is relatively low. However, if no penalties are raised, and hence no money can be collected in this way, a pub- lic agency would be better because its financing can be supplemented with taxes. Marette and Crespi (2005) also discuss the fact that the way a given authority is financed may help explain which enforcement style they choose. It may make perfect sense for an enforcement authority to allow some firms to remain in violation if the revenue generated from these firms in the form of fines can be used to finance inspections for the rest of the industry in a way that encourages more efficient firms to mitigate their pollution. In other words, a pure command-and-control scheme (deterrence strategy) in which all firms must comply with the same standards may be suboptimal as com- pared to a flexible-financing scheme (compliance strategy) in which a regula- tor will use the revenue generated through fees and penalties on a subset of