MONITORING, APPEAL, AND INVESTIGATION - THE ENFORCEMENT AND LEGAL PROCESS

In this article, I consider a model of law enforcement in which a regu latory agency faces the following problem: To induce firms which are r equired to adopt a certain level of environmental care, the agency can make spot checks. This monitoring, however, measures a firm's degree of protection only with error. On the basis of the observed signal, th e agency then has to decide whether or not to fine a firm for taking i nsufficient protection. If it fines a firm which has actually met the level of environmental protection, the firm has the right to lodge an appeal. To plead the cause, the agency then is required to investigate at high cost the actual degree of the firm's protection. In this cont ext we ask how the regulatory agency allocates resources between diffe rent enforcement activities. We show how the structure of the optimal enforcement policy depends on the cost of the enforcement activities, on the uncertainty of observation, on its enforcement budget and other factors.