Enforcement Spillovers: Lessons from Strategic Interactions in Regulation and Product Markets1

We explore enforcement spillovers when sanctions at one entity influence behavior at other entities. Our model illustrates when spillovers arise from a regulatory channel and when they arise from a channel not previously emphasized: product markets. Our model motivates empirically-refutable hypotheses, which we test using data from Clean Water Act manufacturers. We find that penalties create positive spillovers for other facilities facing the same regulatory authority but generate negative spillovers for facilities in the same industry facing a different authority. This is the first paper to explain and systematically document this ‘enforcement leakage’.