The Roles of Recidivism and Liability in Regulation: The Case of Environmental Law

Regulation of ørm behavior when ownership and management are separated is explored. It is shown that downward pressures on the level of a regulated activity emerge due to; risk asymmetry between owner and manager, legal liability, and limited contracting. Obversely, several models of regulator behavior and their implications for regulatory eœectiveness are considered. Using data on all EPA federal regulatory actions against US ørms 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 liability levels, civil lawsuits against ørms are not more eœective at reducing recidivism than administrative actions carrying much lower liability. In contrast, criminal lawsuits, forcing limited contracting between owners and managers, have stronger recidivism reducing properties. There is also support for a dynamic liability eœect propagated through tougher outcomes from civil lawsuits against ørms with one or more priors. JEL Classiøcation: C14, D82, K00, L51, Q28