Designing Cooperation: Agency Design, Credible Commitment, & Regulatory Compliance

• In Event: Making Commitments, Breaking Commitments; The Political Economy of Governance

Abstract

Regulatory compliance is often portrayed as a function of the cooperation that forms between regulated entities and regulators. To cultivate this cooperation, regulatory officers can engage in “flexible” or “cooperative” enforcement,” assuming that they possess a minimal level of discretionary authority, to signal their willingness to negotiate over compliance outcomes (Scholz 1984a; 1984b; 1991). From the firm’s perspective, however, the promise of flexible enforcement is risky in the absence of the agency’s ability to credibly commit to this enforcement strategy, potentially undermining efforts to enhance cooperation.

In this paper, we posit that agency design choices offer a solution to this dilemma. More specifically, we argue that design choices on two dimensions, regional scale (i.e., the number of regulated entities with an administrative regional office) and decentralization of authority (i.e., the amount of discretion regional offices have to implement policy), structure an agency’s ability to credibly commit itself to flexible enforcement strategies. Specifically, we contend that larger regional scales and decentralized authority will better induce firms to mitigate their worst offenses. Recent research on cooperative enforcement emphasizes personal relationships between regulators and regulatees (Pautz and Rinfret 2013, 2016), but ignores the role of formal institutions such as those examined in this study.

To test this expectation, we analyze the compliance behavior of regulated entities in air pollution control in each of the 50 U.S. states, approximately 40,000 facilities in total. We use novel data we have collected from interviews with state agency officials to characterize agency design features for each of the 276 state air pollution control agency’s regional offices. Using these data, we model an individual facility’s likelihood of being designated as a High Priority Violator (HPV), under the Clean Air Act. HPV facilities are regulated sources of air pollution that have persistently failed to meet their emissions limits.

Our regression results suggest that state regional offices with both larger scale and more decentralized authority secure higher cooperation, or lower HPV incidents, among regulated entities. These findings suggest that agency design features operate jointly as commitment devices. The findings have important implications for the design of state regulatory enforcement agencies.

Authors

• David Konisky, Indiana University, Bloomington

• Christopher M. Reenock, Florida State University