Truth or consequences - Enforcing pollution standards with self-reporting

Evidence suggests that a surprisingly large fraction of firms comply with p ollution emission standards even though expected penalties for noncomplianc e are low. We offer an explanation of this puzzle by extending the standard model of enforcement to include a self-reporting requirement and enforceme nt power. These extensions are enough to challenge the conventional result that higher fines lead to higher compliance rates. We find that under plaus ible conditions, higher compliance rates are achieved with lower fines for noncompliance and the cost of enforcing a given level of aggregate pollutio n is minimized by setting the fine for noncompliance equal to zero. (C) 199 9 Elsevier Science S.A. All rights reserved. JEL classification: D62; D82; L51.