A dissolving paradox : firms' compliance to environmental regulation

Abstract

It has often been claimed that firms’ compliance to environmental regulations is higher than predicted by standard theory, a result labeled the “Harrington paradox” in the literature. Enforcement data from Norway presented here appears, at first glance, to confirm this “stylized fact”: Firms are inspected less than once a year, detected violators are seldom fined, but still, serious violations seem relatively rare. However, at a closer look, the paradox dissolves: Enforcement of minor violations is lax, but such violations do flourish; serious violations are more uncommon, but such violations are subject to credible threats of harsh punishment. This seems quite consistent with predictions from standard theory. Although our finding may of course apply to Norway only, we argue that the empirical existence of the Harrington paradox is not well documented in the literature. Hence, the claim that firms’ compliance with environmental regulations is higher than predicted by standard theory should be viewed with skepticism.