Determinants and welfare of the environmental regulatory stringency before and after regulatory capture

Abstract

The enforcement of environmental regulation relies on the willingness and capacity of the regulator. The willingness could be disabled by regulatory capture which is widespread, and that how many public resources should be invested in environmental regulation is always debatable. We develop a 3-stage game to analyze the nonlinear effects and mechanism of regulatory capture and regulatory capacity on environmental regulatory welfare. Our model suggests that the importance of the regional economy to government, the firm size, and the customer’s disutility on pollution emissions will influence the possibility of regulatory capture. Furthermore, the dynamic research suggests that when the regulatory capture is controlled, with the improvement of governmental regulatory capacity, the regulator’s and customer’s welfare continues to grow until the capacity achieves a threshold. Beyond the threshold, the regulatory capacity will be redundant.