Abstract

We present a stylized model of enforcement when monitoring has two stages. Inspection yields a noisy signal of the firm's true performance. Only if that signal exceeds some “trigger” is the firm subject to the second stage of monitoring, the audit. While non-serious violators reduce emissions in response to a tighter trigger, the performance of serious violators may degrade. The impact on total system performance is ambiguous and depends upon the distribution of firm types. An improvement in the accuracy of the inspection technology has a qualitatively ambiguous effect on the emissions of non-compliant firms. Whatever the direction of the effect, the improvement increases the profitability of a subset of violators. The model is likely to be applicable in a variety of enforcement settings and can also be interpreted as a model of complaints-driven enforcement. copy; 2001 Elsevier Science.