Averting Regulatory Enforcement: Evidence from New Source Review

Nat Keohane, Erin T. Mansur, and Andrey Voynov

Journal of Economics and Management Strategy, Volume 18, Issue 1, Spring 2009, pages 75-104.
Working Paper, March 2008.
National Bureau of Economic Research (NBER) Working Paper 13512, October 2007.
Previously titled: “Averting Enforcement: Strategic Response to the Threat of Environmental Regulation”
Social Science Research Network (SSRN) abstract number 935083, October 2006.
University of California Energy Institute (UCEI) Center for the Study of Energy Markets (CSEM) Working Paper-160, October 2006.

Abstract:

This paper explores firms’ response to regulatory enforcement. New Source Review, a provision of the Clean Air Act, imposes stringent emissions limitations on significantly modified older power plants. In 1999, the EPA sued owners of 46 plants for NSR violations. We study how electricity companies respond to both the perceived threat of future action, and the action itself. A discrete choice model estimates plants likelihood of being named in lawsuits increases with large historic emissions and investments. On the eve of the lawsuits, emissions at plants with a one standard deviation greater probability of being sued fell approximately ten percent.