Implementation, Negotiation and Compliance in Environmental and Safety Regulation

Using a formal model of a regulated firm's decision to comply with regulatory standards, we find that decisions to comply depend not only on the level of the standard, but also on how the regulatory agency implements the standards. Firms will avoid immediate compliance if they believe that it is likely to be cheaper to negotiate a compliance agreement with the enforcement agency. At the least, negotiation delays compliance costs; at best, it reduces compliance costs. The model reveals how the availability of negotiated compliance affects the relationship between a firm's decision to comply and agency decisions to alter standards, fines, negotiation costs, targeting policies, and the amount of delay. It also demonstrates that determinations by a given firm to comply or not with regulations may be based on hidden benefits of participation in a regulatory regime, such as the receipt of information on new technology and management innovation. Negotiated enforcement is ubiquitous because it helps regulatory agencies as well as regulated firms. Benefit-cost analyses of regulatory policies that ignore negotiation costs and eventual compliance levels are likely to be misleading as a result.