On Social and Market Sanctions in Deterring non Compliance in Pollution Standards

On social and market sanctions in deterring illegal behavior*

Philippe Bontems*       Gilles Rotillon*

Very preliminary and incomplete draft.

Please do not cite.
April 2007

Abstract

In this paper, we theoretically explore the implications of social norms in deterring
pollution standard fraud along with economic incentives provided both by markets and
regulatory activities. The model assumes that a large number of risk-averse individuals
differ not only in their private cost of compliance with the environmental standard but
also in their individual aversion to fraud. The aversion of fraud is influenced by the extent
of social norms. We show that there may be multiple equilibrium rates of compliance for
a given enforcement policy. We also show that under risk aversion the potential loss in
market revenues has an ambiguous effect on the equilibrium rates of compliance. Simi-
larly, increasing the probability of audit may decrease the equilibrium rate of compliance
when stochastic events make unvoluntary non compliance possible. Last, we show that
the information brought to the market is crucial for polluters’ behavior. For this, we
explore the impact of self-reporting procedures and public disclosure of criminal records.

JEL : Q50, Z13.

Key-words: social norms, asymmetric information, audit, pollution.

* Corresponding author : Philippe Bontems, INRA, Université des Sciences Sociales de Toulouse, 21 Allée
de Brienne, F-31000 Toulouse. Email: bontems©toulouse.inra.fr. Phone: (33) 561 128 522. Fax : (33) 561
128 520.

^tUniversity of Toulouse (INRA, GREMAQ, IDEI); UMR 1291, 21 Allée de Brienne, F-31000 Toulouse.

*Université de Paris-X Nanterre, EconomiX.

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